How to Get a Mortgage With a Poor Credit Rating
- 1). Order your credit reports from each of the credit reporting agencies and review them. Every consumer is permitted to order a free copy of their credit report from each of the three credit bureaus (Experian, Trans Union, and Equifax) through Annual Credit Report.
Dispute directly with the credit agencies any errors. Under federal law, if a consumer disputes a record on his credit report, the agency must verify the reporting account or remove the record from the report completely. - 2). Determine how much debt you have. The amount of debt you owe in relation to your monthly income is called your debt-to-income ratio (DTI). This ratio can be calculated by dividing your total monthly credit card bills, auto loans, student loans, and any other credit lines by your gross monthly income.
For instance, a person with $1,575 worth of monthly payment obligations grossing $3,500 per month has a DTI of 45 percent. Most mortgage lenders prefer a person's DTI to be under 30 percent. - 3). Lower your debt-to-income ratio. You can lower your DTI by paying off as much debt as possible, starting from smallest to largest to raise your credit score. Begin by listing all your debts from smallest to largest, start with the smallest debt and focus on paying it off first, then move onto the next largest debt. This will not only lower your DTI, it will increase your credit score.
- 4). Save for a down payment and points. Once your debt is paid down, concentrate on saving up for a down payment---and possibly points (points are essentially pre-paid interest in which a borrower typically pays one percent of the loan to be qualified). A down payment should equal at least 10 percent, and ideally 20 percent, of the loan.
- 5). Shop and compare mortgage products. Look for the best interest rate, fewest points, a fixed rate, and a 15- to 30-year term. Be careful of interest-only mortgages or adjustable rate mortgage products as they carry a small monthly payment but make paying down the loan balance difficult and may adjust your monthly mortgage payment upward.
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