How to Get a Mortgage With Bad Credit but Good Income

Everyone dreams of having their own house. But buying a house is not easy, even if you earn a handsome monthly salary. A mortgage is a safe option for many mid-earners who want to purchase a home quickly. According to U.S. Census Bureau, approximately 63% of all American homeowners bought homes with mortgages.

While income is essential in qualifying for a mortgage, your credit history greatly determines your mortgage acceptance. So, what should you do if you have a poor credit score? Have a steady income, a small debt load, and a substantial down payment. These three things will successfully score you a Mortgage deal.

However, the process of finding a lender with suitable interest rates along with a bad credit rating condition is a difficult task. Therefore, some considerations should be made when applying for a mortgage application.

How To Get A Mortgage With Bad Credit But Good Income

Image Credits: Image source

Why Should You Use a Loan Broker?

When shopping for a mortgage, most home buyers enlist a mortgage broker’s services to find the best terms and rates. Broker agents act as the middle man between borrowers and lenders and are connected to several lenders that make your mortgage application accepted with a bad credit rating too.

In addition, brokers can assist you in understanding which documents you’ll need to provide to get a mortgage approved and how factors such as poor credit scores can affect your eligibility.

While you can consider directly contacting a lender, as dealing with a direct lender may save you the broker’s fee, you may miss the less-interest mortgages as lenders associated with a loan broker cost you cheaper than the ones you connect with directly.

What Should You Know Before Applying for a Loan?

By now, you probably have the answer to ‘should you use a loan broker? After all, a loan broker will certainly make things easier for you. So let’s move forward.

Below are certain factors you must consider before applying for a loan.

1. Understand Bad Credit:

A credit score plays a significant role in getting a loan as it provides the history of a particular person’s financial activities. People with high credit scores are considered less credit risky and are offered a wider range of credit products at lower interest rates by financial institutions. Thus, you should try to improve your score if you can, as they are certainly something lenders look at but are not the ultimate deciding factor.

2. Earn a Steady Income:

One of the most important factors to be considered is steady income. Any financial institution or lender will only accept an individual’s application if they have a secure and stable income. Lenders will check at least two years of your income if you are a full-time or part-time employee. They will need evidence for proof of employment as it is a crucial component of the application. To prove your employment history, you should submit copies of your appointment letter, pay slips, and verified bank statements.

However, if you are self-employed, things will be a little different. They only consider a steady annual salary. For example, if you have a poor credit rating as a self-employed person, lenders can be reluctant to approve your mortgage loan, but if you have a secure income, they are more likely to approve it.

3. Improve Your Credit History:

The credit history of a person is their financial report card. The report shows how much debt you owe, how many credit cards you have, and whether you pay your bills on time. Therefore, lenders check a person’s credit report to assess whether a person has been a bad or a good debt payer in the past. They predict your future behavior from previous events. So, a person’s loan application will less likely be approved by lenders if they missed payments or went bankrupt in the past. Regardless, you have no choice but to include information about your credit history, accounts, and payment history in your mortgage application.

4. Find a Guarantor With a High Credit Score:

The guarantor mortgage is a mortgage in which a parent or close family member takes on some of the mortgage risks. Try to find a guarantor with good credit history, as they are financially reliable and trusted by lenders to minimize the risk of bad credit rating clients.

Generally, the stronger your guarantor is in the financial department, the better your chances of approval are. The process of acceptance becomes easy, and it becomes convenient to borrow more money.

5. Review Credit Report Regularly:

Maintain a regular credit report review. Verify that the information on it is accurate, up-to-date, and complete. If you find anything that needs to be corrected, contact the relevant lender and ask for an amendment


See Also: Benefits of Using a Mortgage Broker


6. Consider Outgoings Before and After the Mortgage:

When considering lending money to you, lenders will take into account your outgoings to ensure you can afford the monthly mortgage payments. It may include debt repayments, household bills, childcare expenses, etc. Not only this, but they will also consider monthly payments after the mortgage as it will cover both interest and repayment of the loan. In total, you repay the mortgage debt plus interest charges accumulated and accrued throughout the life of the loan.

You should not keep your obligations pending, whether it is a credit card bill or an electricity bill. Make sure you pay them on time to improve your credit score. Delayed payments are the prime factor to cause a sharp fall in the credit rating. Cut down your expenses as much as possible, and ensure that your monthly outgoings remain the same. Make sure you have money left over at the end of each month.

7. Pay Off Debts or Reduce Them:

Reduced or eliminated debt is also a factor to consider when seeking a mortgage with bad credit but good income. Debt is a common issue in today’s society, whether it is student loans or late credit card payments. This type of debt can influence a person’s credit score, and statistics report that this type of debt impacts 35% of the credit score.

Thus, the best way to increase your chances of securing a mortgage loan is to reduce your existing debt. An applicant for a mortgage is more likely to be approved if a lender sees you making an effort to repay debt and make late payments. A credit report showing an old unpaid bill should never be used to make a payment unless it is made in full. Even though partial payments seem to reduce debt, they make the debt more obvious and hurt the credit score.

8. Adjust Debt to Credit Ratio:

The debt-to-credit ratio measures how much you owe on revolving credit compared to how much you have available. According to the scoring model, your debt-to-credit ratio may be one factor in calculating your credit score.

Furthermore, it was significantly correlated with your debt-to-income ratio (DTI), although it didn’t directly affect it. It is imperative to consider both of these factors when determining whether or not you will qualify for a mortgage and auto loan. This is a measure used by lenders, including mortgage companies, to gauge your ability to repay money borrowed and make your monthly payments on time.

To apply for a mortgage with bad credit, one might benefit from adjusting their debt-to-credit ratio. The other way to do this is to lower the amount you owe concerning the credit available to you. The fastest way to improve your credit rating is to improve this ratio, which will make your application more attractive to lenders.

9. Raise Deposit:

If you want your application to be accepted, try increasing your deposit as it will offset the risk of lenders with bad credit rating clients.

Additionally, it also has a good impact on the lenders regarding the borrower’s capacity to save, and he will be able to provide excellent evidence of savings ability. Hence, making your application more attractive to funders.

10. Avoid Applying for Multiple Mortgages:

It is common practice for borrowers to apply to many lenders at once to borrow funds faster due to the significant threat of approval chances.

However, you risk being turned down if you make multiple applications online or approach a mainstream bank for a bad credit loan. This is because not all customers with adverse credit are accepted, and having several ‘hard’ credit checks can jeopardize getting approved further.

It is best to find only the most reputable property lenders to secure mortgage funds for those with bad credit. However, to perform this task effectively, you must possess in-depth, expert knowledge of the entire industry, which you don’t possess as a person outside the industry.

11. Explain Your Situation:

It’s a good idea to note corrections on your report if you can explain past financial difficulties, such as redundancy or illness.

If you have one, you can also explain to your lenders the reasons behind a poor credit score. Providing proof of on-time rent or utility payments for at least one year might help you prove a steady income. One of the best ways is to write a letter that explains the borrower’s circumstances and injects some personality into it. All negative items on your credit report should be addressed and accounted for, no matter how dated or insignificant they appear. Describe how you will prevent this problem from happening again and what you have done to prevent it.

Get some documentation from the doctor if there is a medical issue. You can also include the bills if there is a medical issue. Suppose you were laid off, including a copy of your termination letter or evidence of unemployment benefits. Also, provide proof of your medical insurance.

Having an honest discussion about a bad credit rating may benefit borrowers as lending institutions are more likely to accept borrowers who can prove they can repay their loans.


See Also: How to Buy a Second Home With No Down Payment


Final Words

If you consider all the above factors, your mortgage application will have a fair chance of success. The right advice from a professional or expert can make all the difference. You do not have to give up your dream of owning a home because you have poor credit, as there is more to your financial picture than just your credit history. Even if you have to work harder for a lender or pay higher interest rates, buying a home might be the best option for you if you have the income and savings.


You May Also Like: