So you have bad credit and it’s getting in the way of getting a home loan. Or, you’re afraid that it will get in the way, but you haven’t tried to get a loan yet. Either way, this lesson will help you to get back on track and hopefully, before too long, you’ll be able to qualify for a loan.
Step One – Start Paying On Time Right Away
If you have bad credit, there’s a decent chance that you have some late payments in your credit history. While these late payments will show up for seven years, most banks will be forgiving if your more recent history is a history of on-time payments. For example, if you were to develop six months worth of payments that are 100% on-time, they will be a lot more likely to overlook mistakes of the past. On the other hand, if you have a bunch of late payments in the last few months, it will be a lot more difficult to trust you.
Start now – make every single payment on time. All loans and credit cards will show up on your credit so they ALL will need to be paid on time.
Step Two – Pay Down Your Credit Cards
Having high balances on credit cards really drops your credit score. My fiance, for example, has a credit score that’s just under 600 – not a great score. The interesting thing is that her credit report doesn’t have a single late payment. The primary reason her score is quite low is that her credit cards have too much on them. She’s using almost all of her available credit.
Despite what most people think, home loans for people with bad credit don’t really exist, at least for those with really bad credit. You will need to do a little fixing before you’ll be able to qualify. In her case, she will need to pay down those cards.
I estimate that my fiance will have a credit score of around 700 if she can zero out her credit cards. This will put her into a spot where it will be easy to qualify for a loan, even though right now she probably wouldn’t be able to on her own.
Step Three – Save Some Money
When I started looking into getting my home loan, the first thing I was asked was where the down payment was going to come from. They want to see that you have saved the money for a down payment. If you have some money saved up, it goes a long way toward showing a bank that they can trust you.
The bank is going to want to look at your last few months’ worth of bank statements. This happens because they want to make sure that you didn’t borrow the money you’re using for your down payment. If you want to learn more about this whole process, you can take a look at Whalehook Loans, my loan education site.