For most people, getting a mortgage loan to buy a house is one of the biggest and most difficult financial tasks they will ever have to do. Even more trouble comes for people who have had bad credit in the past. Even though people with bad credit are at a disadvantage, lenders understand their financial problems and needs and offer them mortgage deals that might not be the best but at least give them a chance to own a home.
To get the best mortgage options, a borrower needs to show a lender that, despite a bad credit history, he is responsible with money. Before you apply for a mortgage loan, the first thing you should do is start getting rid of the red flags on your credit report. This will show the lender that you are trustworthy. Start by getting rid of as much of your credit card debt as you can. Pay off other debts, such as car loans or auto loans, especially if there are more than 9 monthly payments left, since auto loans with less than 9 payments are usually not counted as debt.
The next best thing to do is to start saving up for a big down payment on a house. Since you are a bad risk for a lender, the bigger the down payment, the more likely it is that the lender will be able to get his money back if you don't pay. Don't forget to include closing costs in your down payment savings, as they can add up to 3 percent to the price of the house. Overall, saving more than 20% of the total price should make you look more trustworthy.
The borrower should aim to get his monthly debts down to less than 50% of his total income. This will give the lender confidence that he will be able to pay back his mortgage loan without any problems. It's never too late to start better money habits, like using credit cards less and waiting to buy big things. Right now, it would be smart to stick with your current job and not make any unnecessary changes. If you've had the same job for more than two years, it makes you look like a person who doesn't change.
Lenders will look at your bank statements to see how much money you make and how much you spend. Any unusual entry may raise question marks. If a friend or family member gives you money to help you buy a house, make sure the lender knows it's a gift and not another loan. Tell the lender about all your liquid assets and cash reserves. Lenders use these to figure out how much you can pay, and they usually like to see at least two months' worth of mortgage payments in reserve.
Last but not least, things like paying your rent, phone bill, insurance premiums, and other bills on time also help your credit score. Even if you've cleaned up your credit score, you should still talk to more than one lender and compare their terms and conditions to find the best mortgage loan.
