Can you qualify for a mortgage loan with bad credit? These days, it sounds like a stupid question with an obvious answer, but let’s explore this topic. Some will say “of course not!” While others will say it’s impossible. But even if you have bad credit today, aren’t there ways to work towards getting that loan you want? Some thoughts on this below.
So much for eliminating the marriage penalty for filing taxes. Did you know that there could be a marriage penalty when it comes to getting a home loan? There can be, if one of the spouses has bad credit. Not only could a spouse’s credit score make a mortgage more expensive, it can disqualify a couple from buying a home — period, even if the other spouse has stellar credit. Why? You can thank the free love and “mortgage for all” era for this one.
Current credit underwriting guidelines, the ones published AFTER the subprime mortgage crisis, state that a mortgage lender must base his or her decision (regarding whether or not to issue a mortgage and how to price it) on the spouse with the lower credit score. This means that while one spouse has an 800 credit score, if he or she applies for a mortgage with a spouse with a 600 credit score, they will probably be turned down for the loan. Underwriters no longer have the luxury of doing a real time analysis of a couple’s credit profile. It’s now all based on the good old credit score. Note that a credit report is not the same as a credit score, but you can get your report for free through AnnualCreditReport.com.
Tips To Get A Mortgage Loan For Those With Bad Credit
So what can you do to secure a mortgage loan while avoiding having to pay insanely high interest rates? Try these tricks.
Apply Alone For A Home Loan
Simply leave your spouse and his or her cruddy credit out of the picture. The one drawback of this approach is that in order to exclude the spouse’s bad credit, you also have to exclude their income. This can make getting a mortgage tough if there is other existing debt in the applicant’s name. Try to transfer as much of this debt out of the mortgage applicant’s name before applying, in order to reduce the debt to income ratio. The other consideration is to make sure that the couple’s savings is in an account that is listed under the applicant’s name. Open a bank account offering a high yield under the mortgage applicant’s name and transfer the savings into this account.
Delay Applying for a Mortgage
As exciting as the thought of owning your home is, it is a big responsibility. Having a spouse with bad credit may indicate that you and your spouse aren’t quite ready to buy yet. Work on building your savings and improving your credit score. Sure, you’ll probably miss out on those “historically low” interest rates, but odds are, you probably wouldn’t have qualified for them anyway. Only the most qualified applicants are seeing these rates right now due to insanely tight credit requirements. As far as interest is concerned, you’ll actually be better off if you wait until your credit situation improves rather than if you try to take advantage of rates that you may not qualify for.
Regardless of whether you attempt to apply for a loan on your own or as a couple, you and your spouse should make credit improvement a top priority. Your credit score will affect your ability to do just about anything in the future, and having a good score will ensure your financial stability. Understand that making your payments on time each month has the largest impact on your credit score. As a matter of fact, 60% of your score is based on this metric alone! I know from personal experience how having a bad credit score will hold you back from realizing your dreams. What’s great is that credit scores CAN be improved over time with good habits. Understanding what got your credit into the toilet to begin with and correcting those behaviors will go a long way in raising your score. Get a copy of your credit report and begin making those changes today!
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