How do you get a mortgage when you have bad credit

When you have bad credit, is it still possible to get a mortgage loan? Since the housing crash of 2008, it has become harder than ever for those with poor credit to obtain a mortgage loan. If you're ready to try, here's what you need to know.

What Lenders Look For

When you apply for a mortgage, the lender will want to look over your credit report, your employment history, your income, and the amount of debt you are carrying. Lenders will look closely at available cash. If you have cash reserves, you will be able to pay a higher down payment, sometimes as high as 20 percent or 25 percent. If this is the case, you pose a much smaller risk to the lender, and your low credit score may not matter as much.

Lenders also consider your payment history as reflected in your credit score, also called a FICO score. For more information, read "What Is a FICO Score and How Does It Affect My Mortgage Loan"?
Since the subprime lending meltdown, your credit score has become more important than ever to your ability to get a mortgage loan. Lenders are tightening their criteria for making loans, and a poor credit score can keep traditional lenders from even considering you. How can you get around this problem?
First, take steps to correct any mistakes on your credit history. Even one error could potentially make the difference in whether or not you can obtain a mortgage loan. Request reports from all the major credit companies, and review them carefully for errors. If there are errors or inconsistencies, let the credit company know and request to have your record corrected. Don't take anyone's word for the state of your credit history; see it for yourself.
Next, take steps to improve your credit score. Read "Cleaning Up Your Credit Record" to learn more about how to make yourself a better loan prospect. Improving your credit score not only improves your chances of getting a mortgage loan in the first place, but also helps you get better terms on a loan.

Subprime Lenders

You may hear about bad-credit mortgages offered by subprime lenders. Subprime lenders specialize in working with people who have bad credit. While some are legitimate, many are out to take advantage of people with poor credit scores. Since the housing crash of 2008, many subprime lenders have gone out of business. And because of the high rates they charge, even legitimate subprime lenders are a less-than-ideal solution.

FHA Loans

A better option to consider is a Federal Housing Administration loan. FHA loans are made by regular lenders but backed by the federal government. That means the lender is taking less risk by offering you a mortgage loan, because even if you default, the lender will be repaid. FHA-approved lenders are often more flexible in approving loans, which makes it more likely that people with bad credit can qualify for FHA mortgages.