The decision of whether or not to repair your credit before applying for a mortgage or a mortgage refinance is a difficult one. Obviously, the better your credit, the better deal you will be able to qualify for. However, sometimes there is only so much repair that can be done and it can be quite time consuming. If you need to get into a house right away, or you have a deadline to refinance, you may need to compromise.

Get your Credit Report

You have to be informed. The first thing to do is to pull your credit report. You can do this through one of the major credit reporting bureaus, such as Equifax, Experian or TransUnion. If you have been denied credit recently, you may be able to qualify for a free credit report. There are also other agencies out there who specialize in free credit reports. When you do get your credit, be sure to select the type that comes with your credit scores – and if you can get scores from all 3 credit agencies so much the better.

Know your Credit Score

Some bad credit mortgage lenders go with your high credit score, others go with a blended rate. That is why it is important to know what your scores are.

What do credit scores mean?

720 and above: Excellent credit. You will probably be able to get the best rates available – and you should certainly shop around to get the best deal. You will most likely be able to borrow more and you may not have to purchase mortgage insurance.

675 – 719: This range of scores is considered to be an Average-Good credit rating. You may not be able to get the best rates, but you should have little trouble qualifying for a good loan. You will most likely have an interest rate about half a percent above that of someone with excellent credit.

620 – 674: This range of scores is considered to be below average. Expect to pay about two percent more on your loan than if you had excellent credit. You will likely need to provide more documentation and you will

Under 620: This is considered bad credit and you will most likely need to shop for subprime or bad credit mortgages.

How are credit score calculated?

• Payment history – 35% or so is made up of how well you pay your bills on time
• How much you owe – 30% of the score is determined by what % of your credit limits you owe on
• Length of your credit history – 15% or so of the score is dependent on how long you’ve been using credit.
• New Credit – 10% of your score will be based on your new credit. New credit applications and approved credit can lower your score. If you know you are going to be borrowing, try to do all your applications in a short period of time to avoid lowering your credit score.
• Other – 10% of the score will be made up of other factors, like variety of credit sources for example. The more different types of credit you have – mortgages, car loans, credit cards, student loans – the better your score will be.

Before you meet with a mortgage broker, document any reasons for late payments, overlimit issues and so forth. The more prepared you are before your meeting with the lender, the better. They may be able to negotiate with the bank on your behalf to get you a better rate.

Now that you have all this information, you may be thinking, “Yes, but tell me how to repair my credit.” When I had credit issues, the first thing I did to repair my credit report was to look for inaccuracies on all 3 reports. If you find mistakes, write to the credit bureau explaining the error. They have only 30 days to reply – if they don’t respond with proof of the problem, they must remove the item from your credit report.  Repairing my credit wasn’t easy, part of it was writing to the agencies, but part of it was understanding how the score is calculated and starting to change my spending habits. Over time I was able to repair my credit rating and I am now able to qualify for much better loans. But I started out with credit well below 600 – and my first mortgage was a bad credit mortgage. However, I was able to buy a house and build equity as I was fixing my credit.

In the next article, we will discuss determining how much you can afford.

Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan can you Qualify For?

Here is a list of all the articles in this series:

Ins and Outs of a Bad Credit Mortgage | Part One: What are Bad Credit Mortgages?
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan can you Qualify For?
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders
Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit


photo credit: Casey Serin