Bad Credit? Eight Tips for Getting a New Home Loan

by Gabriel Traverso
CMR Columnist

Just because you have bad credit doesn't mean you can't buy a home. Mortgage lenders make new home loans to consumers with bad credit every day. You can take the following steps; however, to improve your situation.

Know your credit report. Make sure you've thoroughly gone through your credit report to dispute any mistakes and correct any errors.
Don't cancel your credit cards. It's good to have at least a couple of credit cards. Pay them down to about 40% of the limit, but not all the way. This way you demonstrate that you can carry a balance and not abuse your credit.
Don't apply for any new credit. Whether it's a car loan, a department store card, or another credit card--don't do it! Wait until after you've secured your new home loan.
Pay your bills on time. One of the biggest considerations mortgage lenders make when considering bad credit borrowers for a new home loan is a consistent payment history.
Save for a down payment. Having a down payment, even if it's only 3%, can make a big difference. If you have no down payment and have bad credit you can find yourself with very few options.
Prepare a letter of explanation. Explain any special circumstances, such as illness, that may have caused your bad credit. Having this in your file can save work for your mortgage lender.
Know how much home you can afford. If you qualify for a new home loan, you need to make sure you don't overextend yourself. If you end up with mortgage payments you can't afford, bad credit will be the least of your problems!
Shop around. With bad credit you are going to pay more for your mortgage. Check with multiple mortgage lenders to try and find the best possible deal.