Home > Mortgages > How to Keep Bad Credit From Killing Your Mortgage

Comments 2 Comments

The credit and financial choices you make today can shape your chances of getting a mortgage in the future. If you have a tarnished credit history, you still may be able to qualify but it will be a document-heavy process.

A mortgage is the largest form of credit a consumer can obtain, so be prepared to prove yourself credit-worthy. Your credit history is important because it not only informs your credit score, but it also provides further insight into how you have, use and maintain your credit obligations.

Lenders will give consumers’ credit a closer look if their history shows a greater possibility that they might not make a mortgage payment on time.

So when you go to buy a house, be prepared for these little lending nuances that may arise if you have an inconsistent credit history.

If You Have a Lower Credit Score

Your payment history is the biggest factor in your credit score, so an unsatisfactory payment history can lead to a lower credit score, possibly resulting in a score less than 660. Conversely, if you pay your loans on time, or as agreed, you’ll tend to have a higher credit score.

Usually a combination of factors lead to a score in the 620-659 range, such as high credit card balances, closed credit cards, a charged-off account or collections with old balances, or little credit as whole. Borrowers with credit scores in this range will have to provide explanations to the lender regarding negative items on their credit history, such as any possible collection accounts, charged-off accounts or delinquencies.

If you have a score within the 620-659 range, you can expect to pay more for a conventional fixed-rate loan. (It can get even pricier if you have little equity to offer, in the realm of less than 10% down.) It would not be unreasonable for a borrower to pay as much as o.375% higher in rate than someone with good credit and a higher down payment. That may seem like a small amount, but it can translate into thousands of dollars over the life of the loan.

If You Don’t Pass Automated Underwriting

All mortgage lenders selling loans to Fannie Mae and Freddie Mac use what’s called “automated underwriting” on each loan application.

When you submit an application for a mortgage, the lender will run an automated underwriting system analysis on your credit, debt, income and assets. Effectively, automated underwriting is an algorithm that comprehensively reviews the borrower’s total financial picture. If automated underwriting results show anything other than “approve eligible” or “accept accept,” you may not qualify without making some adjustments. These adjustments could include increasing your down payment, showing more savings in the bank, procuring a co-signer, changing your loan program (to an FHA loan, for example) or loan term, and taking time to clean up your credit history.

If You Need to Clean Up Your Credit

If you fail the automated underwriting analysis, there are things you can do to improve your credit profile, but you may need to take some time to do it.  These steps may not necessarily be quick fixes, depending on your circumstances, but they are worth it.

  • Pay down your credit card balances to 30% of the total credit line on all credit cards. For example, if you have a credit card with a credit limit of $1,000, you don’t want the balance to exceed $300.
  • If possible, pay off in full all credit card balances, but do not close the credit cards. Closing your credit cards can lower your credit score by lowering your available credit, giving you a potentially higher utilization ratio when you do carry a balance. It will also eventually lower your score by reducing the average age of your credit history when the accounts “age” off your credit reports in 10 years.
  • Prior to applying for a mortgage, you can attempt to deal with old collection accounts by settling the balance, and trying to get the account removed from the credit report entirely — as though the account was never there. Negotiating a settlement with a creditor after applying for the mortgage is different, meaning the borrower would have to zero out the account if the old credit account has a balance exceeding $2,000. Keep in mind, however, that it may not be easy to remove a collection account (this is why) – even if it’s paid – from your credit report. Collection accounts on your credit report, paid or not, will lower your credit score. (The one exception is VantageScore 3.0, which excludes paid collection accounts.)

If you plan on getting a mortgage and know you have some credit challenges, it’s a wise decision to first take the time to bolster your financial picture at the advice of a qualified lender. When it comes to improving credit, it isn’t always intuitive. However, there are services out there that can help you determine the best course of action for your situation.  Credit.com, for example, shows you two credit scores, plus an analysis of your credit and a personalized action plan to meet your goals, all for free. Having a road map can help you make better decisions along the way, which can help you save money in the long run.

More on Mortgages and Homebuying:

Image: irina88w

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Jonathan Buford

    Hi my name is Jonathan Buford my fiance both are 24 and was considering buying a home. I work in the automotive industry we both make 30k a year but owe student loans around 2000 also my credit score is only 540 do you think we would be able to and if so the range of the loan we could be eligible for.

    • http://blog.credit.com/ Kali Geldis

      Hi Jonathan –

      The best advice is to talk to a mortgage officer at a local bank near you. That lender can tell you what loan options may be available to you, whether your debt-to-income ratio will work and what your income will allow you to afford. Generally, you need a credit score above 620 to qualify for most mortgage programs right now. Have any credit-building questions we could help with?

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team