- 1). Obtain free copies of your credit history report from the three primary credit reporting bureaus: Equifax, TransUnion and Experian. Know your Fair Isaac Corporation, or FICO, score and why you have been given that particular score. Look over your reports carefully for any errors or inconsistencies. Report any mistakes to the appropriate creditor, and request to have corrections made.
- 2). Take steps to start improving your credit. Pay off any credit card balances or other unsecured loans and pay all your bills on time. If you cannot pay off the credit cards and other loans, try to pay down the balances. With subprime lenders quickly becoming a thing of the past, it is more prudent to work on increasing your credit score before pursuing a home loan.
- 3). Save a sizeable down payment for your home. You may be more likely to get a home loan with poor credit if you can offer the lender a significant down payment up front, such as 20 percent of the purchase amount. Doing so reduces the risk involved for the lender and may open up more options for acquiring an affordable mortgage.
- 4). Determine how much you can afford. A bad credit home loan can present an opportunity in itself to build up your credit rating, so now is not the time to overextend your financial reach with a house payment that is too large to handle. Be prepared for higher origination fees and interest rates, as lenders typically charge more for borrowers with bad credit.
- 5). Educate yourself on the different types and rates of subprime home loans. Check with your local credit union, bank and savings and loan institutions. You may want to consider working with a mortgage broker or a mortgage company who does its own underwriting, as it will do a more thorough review of your credit history rather than relying solely on your FICO score.
- 6). Investigate government-insured loan options. The Department of Housing and Urban Development and the Federal Housing Administration sometimes work with lenders to make secured loans available for buyers with special circumstances. You can also consider using a co-signer with a good credit score to help you obtain an affordable loan.
- 7). Gather all your financial information. You will need to provide evidence of a steady income, debt-to-income ratio and all liquid assets. If you have recently been working toward improving your credit rating, you can produce a non-traditional credit history for potential lenders with copies of canceled checks showing timely bill payments.
- 8). Choose a loan from a reputable lender. Make sure the loan has a fixed interest rate, reasonable fees and the lowest interest rate you can get for your particular situation.
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