If you have good credit and a steady, provable income, getting a mortgage is pretty straightforward. You talk to a lender. They tell you how much they’ll lend you. You buy a house for that much money or less. No problem.
But what if you don’t have both of those things? What if you have bad credit, or you have a lot of debt compared to income? What if you’re self-employed?
There’s a lot of misinformation about how to get approved under those circumstances. Today, we’ll bring you the best news – and best practices – for the most common situations that make a mortgage elusive.
Getting A Mortgage When You Have Credit Problems
If you have a low credit score or several adverse actions on your credit report, it can make getting a mortgage trickier, but not impossible. Improve your chances and avoid the pitfalls with the following techniques.
DO Clear Out Ongoing Problems
The sooner you identify the problem items on your credit report, the quicker you can clean them up. Check your credit score, and look for three kinds of issues:
- Ongoing problems, like a bill you still owe
- Finished problems, like a car repossession 5 years ago
- Inaccurate information
The solution for all three is to call the creditor as soon as possible. Do not put this off — the sooner you start, the faster it’s done. Once you make contact, your strategy will vary according to the issue.
If it’s an ongoing problem, negotiate a payment plan that includes no longer reporting you to the credit bureaus. Most creditors are happy to help since working with you reduces the chances of you defaulting.
If it’s a finished problem, call the creditor and see what it would take to remove the issue from your credit record. Not all creditors are willing to do this, but you might be surprised by how many will consider it.
If the report contains inaccurate information, get a supervisor on the phone to get it removed. Get everything in writing. Once you’ve finished the call, contact the credit bureau and work on the problem from that end as well.
DO Be Upfront About Your Situation
It might be tempting to start the conversation with a lender by presenting just the best things about your credit and financial position, but that puts you in a rough spot later. Because of the nature of mortgage applications, the lender will find out everything in your financial past.
If you’re upfront about your situation and needs from the start, lenders can help you apply for the best loan.
If you hide details, it may make a loan officer suspicious and less willing to advocate for you. Further, it might mean you waste time chasing a loan or lender you can’t get right now. Better to start from the beginning with the right lender and an accurate application.
DO Pay Down Credit Cards Aggressively
If you can, get the carried-over balance to zero on all your credit cards and lines of credit. If you can’t, get it down to below 30% of your limit on as many cards as possible. Even if it means paying down lower-interest accounts for a while, it’s the best short-term move.
This also helps you qualify for a mortgage by reducing your debt. By lowering your balance (and, therefore, your minimum payments), you decrease your debt-to-income ratio and can get approved for a larger loan or better terms for a smaller one.
DON’T Try To Get More Credit
Every time you apply for credit, it can hurt your credit score. Don’t apply for another credit card while trying to get a mortgage. Hold tight on those opportunities until after the mortgage goes through.
However, it’s fine to shop around for different mortgages. The credit bureaus are smart enough to recognize clusters that represent an intelligent consumer looking at numerous options, as opposed to a desperate consumer looking for multiple loans.
DON’T Forget Your Rental History
Rental histories rarely show up on your credit report positively, but you can engineer your good rental history into your favor. If you can show a 24-month history with no missed or late payments on your rent, it can help you qualify with many lenders.
This may mean getting some documents from your previous landlords, but that’s alright. If your payment history is good enough to help you get the loan, they’ll be happy to help you.
Getting A Mortgage With Income Issues
You may have income issues if you’re self-employed, run a cash business, or otherwise make enough money to get a loan but can’t prove it on paper. Or, your income may be excellent now, but you may lack the cash reserves for a down payment. In either case, there’s still hope.
DO Look Into Low-Income Home Buying Programs
A variety of programs make it easier for low-income families to purchase their first home. These programs include:
- HomeReady and HomePossible loans, which are easier to qualify for and require minimal down payments
- USDA home loans, which can finance at up to 100% of the home value
- FHA loans, which are easier to qualify for with low provable incomes
- Local initiatives in rural and urban areas aimed to encourage families to move in
- Options through your trade union or professional association
If you’re a veteran, nurse, first responder, or teacher, several programs exist to help you qualify for a loan. Ask your union representative for details.
DO Consider Hiring Yourself
Mortgage lenders like to see people who are employees and have W-2 income instead of 1099 income (which is usually sole proprietors or statements of corporate profit). If you can structure your income to come in the form of paychecks direct deposited into your account, it’s worth considering.
First, confirm with your loan officer that this income qualifies. Some lenders won’t count income from a company you own, and some that do require you to have been drawing that paycheck for a set period. Make sure this move will achieve its goal.
Second, run the math on the taxes you’ll pay if you become an employee of your firm. Employment taxes are generally higher than the corporate income tax. Take the time to determine how much extra you’ll spend while qualifying in this way and see if the savings and benefits of the mortgage justify it. In most cases, the answer is yes, but it pays to be sure.
DO Document Everything
Whatever kind of loan you aim for with hard-to-prove income, the more documents you bring to the table, the better your chances of approval. Bring your tax records, bank statements, letters of recommendation, and credit reports.
Take a weekend and go through your statements online to produce and print reports. This work can pay off immensely as you begin the process of getting your mortgage.
DON’T Carry Consumer Debt
With low income, you must come to the table with a high credit score. Zero consumer debt, including a credit card or two with high available credit and no balance, helps build that score month after month.
Zero consumer debt also means your debt-to-income ratio is lower, which reduces the amount of income you need to prove. This can make a large enough difference that it’s worth a temporary sacrifice to make it happen.
In some situations, consider waiting for a little while to work on your credit or income status. Here are some of the issues we see most often:
- Bankruptcy less than 2 years old
- A credit score below 580
- A foreclosure or short sale
- Collections or judgments with a lien on your current house
If you’re in one of these financial pickles, it might make sense to wait until you have more factors in your favor.
Instead, set specific goals for your income and your credit score, and tie hard dates to them. At that point, you can readdress the mortgage question from a stronger position.
Robert Jordanson was a mortgage broker for a dozen years in Chicago. He is now a REALTOR® in Montana, helping clients get houses.