Tips for getting a mortgage with bad credit

April 9, 2007 9:32 AM

The path to a house when you have bad credit...

My wife and I are interested in purchasing a house within the next few years. She has a decent paying job, while mine isn't amazing, with a combined income of just under 60k. The trouble is that in the past I declared bankruptcy due to financial mistakes I made when I was in college (approx 5-years ago). To try to recover, I have taken out a few credit cards, and am in the process of paying them off.

With the credit cards, I haven't made a single late payment and always more than the minimal payment. I also pay my student loans and other debts on time. Our combined Credit Debt is equal to approx 12% of our yearly income. We also have more than 40k in students loans between the two of us, but I'm under the impression that student loans don't count horribly against you when going for a house.

My wife has better credit, though she may have made a reported misstep or two in college (five years for her as well). According to her last credit report, she only has one mark against her.

We're looking to buy a home eventually, with a long-term mortgage (15-30 years). To accomplish this, first we're paying off the credit cards, and then trying to save up the 10%-20% downpayment. We've found houses we'd love for 60k-100k.

We want to be in the best position possible when we start looking for a loan.

1) Should we cancel the credit cards as we pay them off which will apparently hurt our credit score in the short term, leaving only one with the highest available funds, or should we pay them all off and leave them open?

2) What other steps can we take to assure banks that we're the type of people they should lend money to?

3) How will we know when it would be worth trying for a mortgage (how much money saved up/bills paid off/etc.)?

posted by dial-tone to work & money (21 comments total)

IIRC, the bankruptcy should be off my credit report after 7 years (so I should only have two years to wait if that will help), though I'm not sure the marks against me that lead to the bankruptcy will be gone as well.
posted by dial-tone at 9:33 AM on April 9, 2007

Call a mortgage guy that a friend refers you to, have them pull credit and they can help you from there.
posted by thilmony at 9:42 AM on April 9, 2007

Not a direct answer to your question. If you can find a house for sale by owner and have them finance it that would make it easier to get into a house. Or find someone retiring that would like the monthly income. That way they earn interest and might be encouraged to sell that way. Just keep working toward a clean record but in the meantime (or whenever you can) look for a house for sale by owner. Or a lease with an option to buy. These leases can apply a percentage of the rent toward a down payment. Try to be a bit creative and you may be in a home before your credit is clear.
posted by JayRwv at 9:45 AM on April 9, 2007

Call a mortgage guy that a friend refers you to, have them pull credit

I've been intrigued by this idea, my only concern is that each credit report request (or so I've been told) affects your credit rating negatively.

Should I do this asap, realizing it will probably be a while before I can get a home loan?
posted by dial-tone at 9:48 AM on April 9, 2007

You saw this post, right?
posted by salvia at 9:49 AM on April 9, 2007

I think a bankruptcy is actually 10 years, and everything else is 7.

They'll care more about recent history. Do pay down your debts, and don't cancel your accounts. Have a few long term accounts open looks good, as long as you keep them paid off.

Only cancel them if you are tempted to use them irresponsibly, and speaking of that: 12% of your annual income is $6000 or so - that's sort of a high amount of debt. Are you continuing to add to the debt?

Do you have any money saved for a down payment? Or money in an emergency fund?

If you've been good the last few years things might be better then you'd think. Have you check your scores lately?
posted by voidcontext at 9:50 AM on April 9, 2007

Downpayment, downpayment, downpayment.
posted by unSane at 9:52 AM on April 9, 2007

I just got a mortgage, and there are a few things that they really look at: income, assets, credit score, and debt to income ratio. It sounds like you have been doing a good job paying your bills, and that is about the best thing you can do for your credit score, a score of around 720 will get you the best interest rates for most lenders.

To answer your questions though:
1) no, my understanding is that closing your accounts will negatively impact your credit score
2) keep your credit score up, pay your bills on time, decrease your debt to income ratio
3) Once your credit gets aroudn that 720 mark would be a good time, then you woulnd't be subjecting yourself to any subprime loans.
posted by caflores22 at 9:53 AM on April 9, 2007

Salvia, I did read the linked post, to me it seemed we were in somewhat different situations (we don't have the downpayment yet, do have credit cards, etc.). There's lots of good advice there, though.
posted by dial-tone at 10:01 AM on April 9, 2007

The impact to your credit from a credit check is microscopic and short-lived. If you have 12 lenders pulling your credit report this week and go to buy a car next month, auto financers might say "um, you seem a little busy, what's up with that - are you going to have any money left for us?" but it's not the same kind of "damage" as a late payment.

Get your numbers run so you can plan appropriately.
posted by Lyn Never at 10:05 AM on April 9, 2007

I've heard (and make no representation regarding the accuracy thereof) that only the first credit check for a mortgage in a certain amount of time affects your credit report--lenders are expecting you to be comparing deals.

You can also view your score (without hurting your credit at all) here.
posted by phoenixy at 10:09 AM on April 9, 2007

I think a bankruptcy is actually 10 years, and everything else is 7.

Bankruptcy is 7 for chapter 13 (reorganization) and 10 for chapter 7 (elimination), I think.

However, for a secured loan, it's not as big a deal as you might think. Once you have discharged your bankruptcy, you can't declare again for 7+ years, so (assuming your debt is otherwise manageable and your recent payment history good) you may actually be seen as a better risk than someone with many late payments and/or a lot of debt. If you come with a down payment, you will definitely be able to get a mortgage.
posted by kindall at 10:14 AM on April 9, 2007

Do some basic reading on credit -- the Nolo books are good.
posted by footnote at 10:14 AM on April 9, 2007

Keep your credit cards. That actually helps.

Go talk to a realtor or mortgage broker. They will have suggestions on ways to make your credit look better, but my guess is you can buy a house right this minute.
posted by konolia at 10:25 AM on April 9, 2007

Pull your own credit like phoenixy suggested and take that to the mortgage person if you don't want them to pull credit.
posted by thilmony at 10:42 AM on April 9, 2007

Keep the credit cards. Pay them off. In fact, after you have paid them off, pay them in full every month. Consider calling the credit card companies in the next few weeks to say "You know, there are places I can get a better interest rate. What can you do for me?"

Don't worry too much about the student loans. They are what they are, and if you keep sending the money every month they will be over soon enough. Student loans in good standing say that you are college educated and therefore have greater earnings potential.

The couple years it will take you to save up the downpayment will be plenty of time to get the credit score whipped into shape. Just keep paying the bills in the meantime.
posted by ilsa at 11:16 AM on April 9, 2007

It's actually not that hard to get a mortgage. Remember, loans are a product that the mortgage company is selling you. They make money on the loan, assuming you pay. They want to give you a loan. So all you have to do to get a loan is demonstrate your ability to pay it each month. You might get a slightly worse interest rate if you have bad credit, but interest rates are still pretty low. I bet you could buy a house right now, even with little or no downpayment.
posted by selfmedicating at 12:22 PM on April 9, 2007

Downpayment, downpayment, downpayment.

I don't know about that. I just bought a house/got a mortgage, and expected hassle over my credit, and to be wishing I had even more cash on hand.

Instead, I got a bank and a mortgage broker competing to offer me good rates, and suggesting paying off credit cards and making a low downpayment.

Short story, I'm almost kicking myself for not having looked at buying a house some time ago. All mortgage payment scenarios, even with 5 or 10% down, worked out to be cheaper than my rent.

Go talk to a broker/bank; it can't hurt. They can probably give you a good idea of things even without checking your credit.
posted by kmennie at 1:06 PM on April 9, 2007

You'll need to find a mortgage company, bank, or credit union that does it's own underwriting. A place that looks only at your FICO score is not going to be helpful. You want a place that will consider your unique situation.

Having 20% for a down payment will meet the first and greatest requirement. Lenders like you having a dog in the hunt, having something to loose.

Work to make your monthly payment no more than 25% of your monthly net income.
posted by kc0dxh at 1:37 PM on April 9, 2007

Definitely keep your cards open after you pay them off.

I can tell a story here from my days as a college student with a credit card. I got one with a $500 limit as a freshman, used it responsibly, and paid the balance in full, every month, on time. When I graduated, I started to charge 2-300 per month, and occasionally bumping up against the ceiling if I happened to buy a plane ticket, or repair my car. As I had a job, I was still paying in full, on time, every month.

I figured it was time to get a higher limit on my card, so I asked for one. I was denied.

I was like, WTF? It seems like they give anyone a 2k limit-- why not me with my four-year sterling history and decently paying job? Well, it turns out that I was "maxing" out my entire (meager) credit line, and that alone was enough to knock 150 points off of my FICO when I pulled it.

I basically had to wait through a month of charging NOTHING before I could ask for a modest raise on the limit.

Bottom line: keep it open- 30% of your FICO score is your "use" of your accounts, and this factor is basically the ratio of credit to current debt.

Also, the best allocation strategy is to pay off the minimum allowed on every card, plus as much as you can on the highest interest card.
posted by Maxwell_Smart at 8:20 PM on April 9, 2007

I meant to say this earlier: buying a house right now with poor credit is not what I would do, since prices are falling and interest rates (especially for people with poor credit) rising.
posted by unSane at 11:14 AM on April 10, 2007