Mortgage Advice

What to Do When a Poor Credit Report Plagues Your Ability to Get a Mortgage

August 15, 2013

It’s popular belief that a credit score can be the ultimate make-or-break component of qualifying for a mortgage loan. While credit scores are important, contrary to popular belief, they are not the most important factor lenders evaluate. While your credit score provides a starting point for lenders to gain insight into your financial health, it’s only a piece of the puzzle.

To get a complete picture, lenders ultimately rely on your credit report—which could potentially reveal some red flags hidden behind a favorable score. Whether you’ve encountered a financial hardship, filed for bankruptcy or experienced a foreclosure, and a poor credit report is plaguing your ability to get a mortgage, there are some things you can do to rebuild your credit and improve your chances of qualifying for a loan.

After pulling a mortgage applicant’s credit score, lenders will do a deeper dive and review, at minimum, the past two years of their credit history. When lenders evaluate someone’s credit report, they specifically look at their payment history, amount of debt, type of credit, length of credit history and number of credit inquiries.

Typically, lenders like to see three to four lines of open credit (revolving and installment debt) that have been consistently paid on time for the past 12-24 months. They also like to see that applicants are responsibly using their available credit, meaning they don’t frequently use more than 50% of their available credit, max out their credit card or open new lines of credit.

That being said, it can’t be stressed enough how important it is to review your credit report for errors. Any mistake reflected in your credit report, whether it’s a late payment, collections request or incorrect inquiry, will hinder your credit and impact the application process.

If your credit report has some blemishes, but does not contain any errors, there are other indicators you can use to demonstrate financial responsibility. For example, someone who has a bankruptcy or foreclosure listed on their credit report can use their rental history to vouch for their ability to repay debt.

Once a lender has a better understanding of an applicant’s financial situation, they can begin to look at what lending options are available. Those who meet the minimum credit score limit of 620, but have blemishes on their credit report, may be able to secure financing through the Federal Housing Administration. Not only does a FHA loan allow for credit imperfections, it requires a small down payment investment and does not include interest rate penalties.

While lenders might be able to extend financing to some individuals, there are times when they’re unable to approve an applicant. In these instances, lenders should work with the applicant to restore their credit history and improve their credit score in a reasonable amount of time. In fact, there have been instances where I’ve seen clients bring their credit to an acceptable range within just a few months.

It’s important for consumers who have gone through financial difficulties to become educated on how credit works and how to responsibly use it. By developing a stronger credit report, you’ll be able to demonstrate you’re proactively working toward correcting the financial mistakes of the past, and begin a dialogue as to a future mortgage loan.