3 Ways to Get Approved for a Home Loan Even With Bad Credit

By Richard Warner

I have been an investor and landlord for 5 years. When I got my official real estate license, I started as a First Time Homebuyer Specialist and have since received specialization certifications in Luxury Homes, Probate, and Divorce.

Securing a home loan with bad credit can be a challenging feat, but it’s not impossible. With strategic planning and a proactive approach, you can increase your chances of getting approved for a mortgage, even if your credit score isn’t pristine. Today, we’ll explore three key strategies to help you get approved for a home loan despite having less-than-perfect credit.

1. Loan-to-value ratio. The down payment amount is a critical factor in determining your loan-to-value ratio, which compares the loan amount to the appraised value of the property. Banks and lenders assess your risk factor and are more likely to approve your loan if you have a lower LTV ratio. By paying a larger down payment, you reduce the loan amount, thereby lowering your LTV ratio.

While the standard down payment is around 3.5%, consider saving up to 10% if possible to get the most optimal interest rate. This will put you in the low-risk category for the lender and seller, improving your chances of loan approval, lowering your mortgage payments, and potentially providing better loan terms.

2. Lower your debt-to-income ratio (DTI). Lenders also evaluate your debt-to-income ratio when assessing your loan application. Your debt-to-income ratio is your income minus certain expenses, such as your car payment and other debt. Lower your DTI by paying down existing debts, increasing your income, or getting a co-signer for the loan. By actively managing and improving your DTI, you demonstrate to lenders that you have the financial capacity to handle mortgage payments responsibly.

3. Clean up your credit report. Errors or inaccuracies in your report could be impacting your score negatively. Additionally, paying off outstanding debts may not always reflect promptly on your report. To clean up your credit report, dispute any errors with the credit bureaus to have them corrected, and ensure that any paid debts are accurately reflected on your report. You can also negotiate with collections agencies when they’re attempting to collect and have your debt record removed from your credit report.

The best thing to do is to take a small loan, consolidate all of your debts, and try to pay them all off. Then, you’ll only have one payment to make per month on all of your debt. This can reflect positively on your record because if you’re not missing any payments, there’s no delinquency, and you’re building credit. Some collection agencies would happily take 50% of what you owe to call it even. You can also request to remove paid debt entries completely to have a clean slate. By addressing inaccuracies and managing your credit, you’ll have a more favorable financial profile to potential lenders.

Remember to consult with financial experts and explore various lenders to find the best possible terms for your specific situation. If you have any questions about how I can help you secure a home loan despite less-than-perfect credit, don’t hesitate to reach out to me by sending an email or calling me at (502) 338-2861. I’m only a phone call away.