Mortgage Loans for Bad Credit

Miranda Marquit
by Miranda Marquit, Contributor

When it comes to buying a house, chances are that you will need to borrow money in order to make such a large purchase. When you apply for a mortgage loan, the lender will check your credit rating to determine your risk as a borrower.

Your credit report is like your financial reputation ― it is a guide to your financial history and a measure of your future risk. Your credit score is a based on the information in your credit report. If you have a bad credit score, it will be more difficult for you to obtain financing. Banks and other lending institutions use your credit score to evaluate your reliability as a borrower, which helps them decide whether or not to offer you a mortgage loan.

The Impact of Bad Credit on Your Mortgage Loan

Prior to the financial crisis of 2008, it was not very difficult to get a mortgage loan ― even with bad credit. Many loan officers and mortgage brokers were anxious to get commissions from arranging mortgage loans, and banks would re-sell them to reduce their burden. However, since the financial crisis unfolded, it has been more of a challenge for homebuyers to get mortgage loans with bad credit. However, it is still possible in certain cases.

If you do get a bad credit mortgage loan, you will most likely have to pay more for it. In order to reduce the risk that you present to the lender with a bad credit mortgage, you may be required to pay a higher interest rate. A higher interest rate means you will be paying more for your mortgage in the long run, but it gives the mortgage lender a better chance of recouping their money if you happen to default. Also note that interest can build up tremendously over time ― a borrower with bad credit may end up paying tens of thousands of dollars more in interest than someone with good credit.

Getting a Mortgage Loan if You Have Bad Credit

If you are willing to pay a higher interest rate, and possibly a larger down payment, you may be able to get a mortgage loan even with bad credit ― though it depends on your specific circumstances. If you can make an especially large down payment (25% - 30% or more), you may be able to secure a loan even with a low credit score.

Some lenders will consider you for a mortgage loan if your bad credit is the result of financial misfortune. However, many banks will require you to show that you’re making efforts to get back on your feet and improve your money-managing habits. You may consider writing a letter to the lender that explains your situation, what led to your bad credit, and the steps you are taking to improve your finances.

Since credit score requirements vary among lenders, it’s impossible to say that a specific score will qualify you for a certain mortgage loan. Just remember that bad credit doesn’t mean you won’t get a loan at all ― but if you do get a loan, you’ll probably have to make a larger down payment and you’ll be charged a higher interest rate.