It’s no secret that lending standards have gotten tougher. It’s harder to qualify for a new home mortgage loan for just about everyone, not just those with bad credit. It’s also more difficult to crack into the top tier of credit scores that would earn you the best loan terms.
So, should if you have less than perfect credit, should you give up on approaching mortgage lenders? Of course, not – but it definitely helps to have a strategy. It may take a little longer to get a mortgage with fair or bad credit, but here are ten things to do to overcome that bad credit and appeal to lenders:
1. Make your credit and loan payments on time. The first and most important step toward overcoming credit problems is to change the habits that led to those problems. Think of it this way: credit problems are part of your history, and you need to start writing a new history. You do this by putting together a track record which shows you are now able to consistently meet your financial obligations.
2. Understand your credit problems. While you build toward the future, it’s important to understand your past. Get a copy of your credit report to see what the problems are. Identify what caused those problems. Were they one-time mistakes? Do they indicate that you live beyond your means from time to time and need to rein in your lifestyle? Or are your credit problems simply a result of poor organization, of not keeping track of your bills and their due dates? The more you understand about what caused your credit problems, the better you’ll be able to address them.
3. Address mistakes in your credit report. Of course, there may be errors in your credit report, and you’ll want to address these immediately. Approach both the credit rating agency and the creditor who reported the error. When you feel you’ve reached an understanding about what the true history is, be sure this is confirmed in writing.
4. Consider the length of your credit history. Part of your problem in qualifying for a mortgage may be that your credit history is not long enough. Time will take care of this to some degree but use that time to assemble a track record of responsibly handling a combination of installment loans and credit card payments.
5. Know when credit problems occurred. If there are genuine problems in your credit history, keep a record of when they occurred. Past credit problems may haunt you for as long as seven to ten years, but they are given especially heavy weight in the first two years. Once your problems are more than two years in the past, you may want to try approaching lenders again.
6. Control your credit mix. Again, a mix of installment and credit card debt makes an ideal track record (assuming payments are made on time), but be wary of adding too many credit cards.
7. Pay down existing credit balances. Even if you are meeting your minimum monthly payments, carrying credit balances can count against you. Lenders look at how close you are to your credit limit, and that ceiling may have gotten closer–card companies have been slashing credit lines to the bone.
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