How to Get a Mortgage With Bad Credit

Last Updated on January 14, 2022 by Maggie Sutton

What’s the best way to get mortgage-ready in this crazy competitive housing market? All of the headlines out there suggest it’s a tough market for buyers, and that’s true. So, should you try getting a mortgage with bad credit? The quick answer is “yes”. But, you need to start improving your credit goals immediately, as the housing market will only get more competitive. The housing market has been on a trajectory that has seen home prices skyrocket as demand soars beyond available inventory. This helped raise mortgage borrowing to record heights last year, and is expected to drive lending even higher this year.

Current State of Mortgages and Credit

The Mortgage Bankers Association projects the dollar value of for-purchase home loans will climb to a new high of $1.74 trillion this year. That’s after bankers lent an estimated $1.61 trillion last year, up about 9% from 2020. Last year topped the $1.51 trillion lent at the peak of the housing bubble in 2005, the highest on records going back to 1990.

Interestingly, lenders issued fewer loans – 4.74 million –  to borrowers buying a home last year, down from 4.92 million in 2020, according to the MBA. The surge in volume is down to the dollar value of for-purchase loans increasing last year as home prices surged, often as homebuyers agreed to pay well above a seller’s asking price to outbid competing offers.

In fact, mortgage credit availability which had been trending upwards since the start of the pandemic, when lenders tightened borrower requirements, got a bit stricter in November, causing the Mortgage Bankers Association’s Mortgage Credit Availability Index to fall by 0.6%. Any time that index drops, it’s an indication that it’s becoming a bit harder to get a mortgage for those with less-than-perfect credit.

A closer look shows that the lending availability was different depending on the market segment. An increase in conventional credit availability was offset by a decrease in government credit, as lenders reduced their offerings of government loan programs with lower credit scores, as well as those for investment homes.

That means optimizing your credit is not only key to leveraging the best mortgage product out there but an essential to access today’s uber-competitive housing market.

Improve Your Chances of Getting a Mortgage with Bad Credit

If you are in the number of buyers looking to get on the housing ladder here are some basic steps you can do to immediately begin to improve your credit standing with lenders. 

1. Monitoring your credit report to make sure there are no errors is one way to make sure you are optimizing your credit. If it’s inaccurate, take steps to fix those mistakes. It’s a good idea to check your credit report at least six months before you plan to shop for a mortgage so you have time to find and fix any mistakes.
2. Improve your credit score. Usually, you’ll need a minimum score of 620 to qualify for a traditional mortgage. This understandably may seem like a daunting task, but in reality, a solid financial plan that steadily pays off revolving debt while not adding new debt could go a long way toward improving your credit score. A second reason reducing your revolving debt is important is because mortgage lenders pay attention to debt-to-income ratio. This measures your monthly obligations (bills, debt payments, etc.) relative to your income. The lower your monthly costs, the more appealing a loan candidate you’ll be. If you have the means to pay off some debt, do it without taking on more debt.  
3. Mortgage lenders also look for consistency in employment. In other words, demonstrating a steady job history shows lenders your ability to keep up with mortgage payments. You can ask your current bank to see if you’d pre-qualify for a mortgage. Their response will inform you of your credit standing.
4. Come up with a higher down payment (without taking on more debt). The higher your down payment, the lower your loan. Putting more money down also lowers your loan-to-value ratio, which is a measurement of the size of your loan relative to the value of the home you’re buying. 

Homes for Heroes Can Help

Here’s the good news! Homes for Heroes is able to help with your home buying journey. If you’re a teacher, in the military, law enforcement, firefighter, EMS, or healthcare worker, we’ve got your back. We connect you with a real estate agent and a mortgage specialist to help you every step of the way. 

These are the people to answer all your questions and to help you understand costs. Plus, once you do buy your home, you’ll get Hero Rewards back after closing, just for being a hero. On average, our heroes save $2,400 when buying a home that you’ll get back as straight cash. You can use it to make your first few mortgage payments or decorate your new house. 

If you’re interested in finding out more about our program, you can sign up for a real estate agent to connect with you. 

There’s no obligation to sign up for the program, and there’s no cost to you either. It’s the same buying process that you’d have with any other real estate agent, just with bonus Hero Rewards. Sign up today to get the ball rolling on owning your own home.