A few months ago, a client came to us frustrated and ready to give up. Their credit report listed several collection accounts from Credit Human, Harris & Harris, National Credit Systems, ProCollect, and Southwest Credit Systems. These accounts lowered their score and stopped them from getting approved for a mortgage.
We reviewed their credit report and spotted inaccurate and outdated items. Then we filed disputes with the credit bureaus under the Fair Credit Reporting Act. After several weeks of follow-up, the results came in. Every disputed account was deleted from their report.
Once the deletions were confirmed, their credit score improved by more than 100 points. Soon after, they were pre-approved for a home loan.
This real result shows what happens when you take control of your credit report and stay consistent with your financial goals.
How To Get Approved For a Mortgage With a Low Credit Score
The homebuying process can often feel inaccessible or intimidating if you have a lower credit score. Conventional mortgages typically have strict credit score requirements that can deter many families from pursuing homeownership. If you have bad credit, you aren’t completely out of options. Certain loan types and debt repayment strategies can get you on the path to homeownership quickly and easily.
You can start with these simple tips to improve your chances of securing a mortgage and starting your homebuying journey.
Assess Your Financial Health
The first step in approaching any major financial decision is to assess your current credit health. Mortgage lenders take a look at a few aspects of your financial health to determine your risk as a borrower.
This is exactly what we did with the client whose deleted accounts helped raise their score by more than 100 points. We started by reviewing their entire credit profile to see what was helping and what was hurting their score. You should do the same.
Check these key areas:
- Review your credit reports from all three bureaus. Look for errors, duplicates, or accounts that do not belong to you.
- Confirm that all your payment histories are accurate. Even one reported late payment can lower your score.
- Review your balances. High balances compared to your limits raise your credit utilization ratio, which lowers your score.
Mortgage lenders look at your credit history, payment consistency, and overall debt level. They also check your debt-to-income ratio (DTI). This shows how much of your income goes toward debt each month. A DTI under 43% is ideal for most lenders.
Credit experts often recommend this process before applying for a loan:
- Add up all your monthly debt payments, such as credit cards, auto loans, and student loans.
- Divide that number by your monthly income before taxes.
- If the result is high, focus on paying off smaller debts first to lower your ratio.
In our client’s case, removing inaccurate accounts instantly improved both their DTI and their credit score. Once their report was cleaned up, lenders viewed them as a lower-risk borrower.
Your financial health shapes your loan options. Reviewing and improving it before you start the homebuying process saves time, money, and stress.
Explore Loan Types
While conventional mortgages have fairly strict credit score requirements, alternative loan types are available to help make homeownership more accessible. You may qualify for these loans depending on your income, type of employment, or even your status as a veteran. VA loans can help veterans secure a home loan with lower down payment options, eliminating the need for mortgage insurance.
If you’re wondering, “Can I get a VA loan with bad credit?” You can! While lender requirements may vary, VA loans typically have more flexible credit score requirements. There are also FHA loans, backed by the Federal Housing Administration, for homebuyers with lower income levels and more accessible credit score requirements. USDA (Department of Agriculture) mortgages have more flexible credit score requirements to help populate more rural areas, though there are some restrictions on where you can purchase a home.
There are even subprime loans made for borrowers who have limited or poor credit history, though you may need to pay for fees or insurance as a higher-risk borrower. Meet with multiple lenders and explore your options.
Save for a Large Down Payment
When you have a lower credit score, you may be limited as to how much you’ll be able to borrow. You can counteract this with a larger down payment. Larger down payments give you more equity in the home and lower your risk as a borrower. If current debts don’t weigh you down, a large down payment can be quicker to save up for and allows you to secure a mortgage more easily than a lower one. If you’re able to provide a higher down payment, consider saving up for it.
Find a Credit-Friendly Lender
Not all lenders are created equal. Some lenders have strict credit score requirements to reduce the risk of lending. Some lenders are more lenient toward borrowers with riskier credit histories and may even offer dedicated services to assist those with lower credit scores. Begin by conducting online research on credit-friendly lenders in your area or online.
Visit with multiple lenders and compare interest rates and mortgages that you’re comfortable with taking on. Keep in mind that the lower your credit score, the more limited your options may be.
Pay Down Your Debt
If you’re able to pay down any debt, you can improve your credit score and reduce your debt-to-income ratio, making you more attractive as a borrower. Even paying off smaller debts, such as small credit card balances or loans, can make a difference in the amount of available credit you have. If you can afford to pay down debt before starting the homebuying or borrowing process, you should take advantage of it. Paying off debt can take some time to be reflected in your credit score and history, but it can help provide more flexible loan options.
Improve Your Credit Score
If you have the flexibility to wait a while before starting the homebuying process, you can work on improving your credit score to help unlock more mortgage and lender options. There are several excellent ways to improve your credit score or prevent it from further declining.
You’ll want to keep your credit accounts open even if you’ve paid them off. Instead of closing a credit card account when your balance reaches zero, you’ll want to leave that credit line open to increase the amount of available credit you have. Make on-time payments for your debts and bills to avoid late payments being reported to credit bureaus. Don’t take on any more debt or apply for new credit inquiries while you’re waiting for your credit score to improve. Applying for new debts or lines of credit can often cause a temporary decline in your credit score.
Get Pre-Approved
Finding a home you love and making an offer on it should be a quick and seamless process. Not knowing what loans you qualify for or how much you can technically afford can cause delays and often lead to your offer being declined. Find a lender that is happy to work with you, and obtain a pre-approval based on your current financial status. A pre-approval helps you search for homes within your price range, and it puts sellers at ease knowing you’ve started the process with serious intent.
Conclusion
It’s not impossible to obtain a mortgage with bad credit. You’ll just need to be open-minded about your options and flexible with what you can afford. Try to work on eliminating debt as much as possible to improve your debt-to-income ratio. Avoid taking on more debt and make on-time payments to continue improving your financial health. Compare different lenders, and look for credit-friendly lenders for the most flexibility.
Learn about certain mortgages, such as subprime loans or VA loans, that often have more flexible credit requirements.
Many options are available to make homeownership more accessible; you’ll just need to get a little creative and flexible.