7 Mortgage Qualification Tips for Borderline Borrowers

It’s super easy to qualify for a mortgage when you have an 800 credit score, a six-figure salary, no debt, and 20% to put down. But that isn’t everyone’s story.

It’s far more difficult to be approved with a 620 credit score, a low five-figure salary, some outstanding debt, a car loan, and 3% for the down payment. You can still qualify, but it’s a LOT more difficult. And you’re not going to be getting the lowest rate around.

I asked some experts for their mortgage qualifying tips for borrowers who run the highest risk of being turned down. Here’s what they had to say:

7 Mortgage Qualification Tips for Borderline Borrowers

Go FHA

“Applicants with a low credit scores should be sure to look for lenders who offer FHA-insured mortgages. The FHA will insure mortgages with lower credit scores than most others will accept. Borrowers with small savings should look for lenders with low-down-payment requirements. Again, an FHA-insured lender may be the right match, but Fannie Mae and Freddie Mac also have programs with low down payment requirements, so applicants should ask their lenders about those as well,” says David Reiss, a Law Professor at Brooklyn Law School who also writes at REFinBlog.com.

J.D. Crowe, President of Southeast Mortgage of Georgia agrees. “Those with less-than-ideal credit scores sometimes have home loan options through the Federal Housing Administration. The FHA works with approved lenders to help applicants who have lower credit scores and small down payments, and can offer as much as 96.5% financing.”

Remove Errors on Your Credit Report

“Inaccurate charges or false information on credit reports are not uncommon and can severely — and unfairly — damage a credit score. Fortunately, errors can be reported and corrected, although it can be a lengthy process. Borrowers should review his or her credit reports in detail, highlighting the errors and making copies of the pages where errors are found. It’s always a good idea to mail, rather than submitting online, the copies, evidence, and explanation to each bureau that is reporting the inaccuracies,” continues Crowe.

Address Delinquencies

“One of the first telling signs of a high-risk borrower is the status of delinquent accounts, which include collections, late accounts, and charge-offs. Those looking to improve their credit score to help them qualify for a home loan should take the necessary steps to address these debts as soon as possible. Borrowers need to understand that repaying the debt won’t remove the black mark from their credit report, as it could remain for up to seven years. However, taking swift action will help them become more credit worthy and could even gain a few points on their score,” recommends Crowe.

Related: Mortgage Questions, Answered: How to Qualify For & Obtain Home Financing

But Don’t Dispute Legitimate Debt

“Online access makes it easy to dispute negative entries on your credit report, but if you know it is something you owe, disputing it looks bad to mortgage underwriters. They might ask, “Does this person take out loans or credit cards, not pay them back, and rely on disputes? Not a good credit risk,” advises Delaram Shoorideh of MarketplaceHome.com.

How Bankruptcy or Foreclosure Impacts Ability to Secure a Loan

“For those whose credit has been impacted by a bankruptcy or foreclosure, it’s important to note that your credit score will recover in time after reestablishing a good payment history. The most important thing for people to know after a foreclosure or bankruptcy is to always pay everything on time, especially a mortgage payment. Underwriting guidelines are forgiving of a onetime event; if it is a pattern of irresponsibility after a foreclosure or bankruptcy, the opportunity to obtain another mortgage is diminished greatly. If you have had a foreclosure or bankruptcy, accept responsibility, pick yourself up, and move on. Most importantly, make every effort to pay everything on time going forward to reestablish your credit,” asserts Crowe.

“For those dreaming of homeownership, poor credit may seem insurmountable. However, knowledge is power. While there is no such thing as a quick credit fix, by arming potential borrowers with the knowledge to rebuild their credit, they may feel empowered to reach their ultimate goal of homeownership.”

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Pay Down Debt Wisely

“For people who are borderline and need to pay off a little debt to qualify, it’s important to know exactly which debt to pay off first.

Normally, financial planners may recommend paying off the highest interest rate loans first. This makes sense for the general purpose of saving money in the long run, but it may not make sense when qualifying for a loan.

The reason is because banks use the debt to income ratio, so you want to pay off the loan that reduces your monthly debt the most per dollar you spend on paying that debt off.

The easiest way to figure this out is by taking the amount you owe on a particular payment and dividing it by the monthly payment.

For example:

Loan A) $5,000 installment, $75/month payment
Loan B) $2,500 installment, $40/month payment
Loan C) $25,000/month, $350/month payment

The results of the calculating are A) $66.6, B) $62.5, C) $71.43.

It can be read, ‘To reduce my monthly debt by $1, I have to pay [$66.6, $62.5, or $71.43].’

In this particular example, you can see that paying off the large loan actually helps you less than paying off the small loans. A person with limited funds and who needs to get their DTI in check may really need to know exactly what to pay off first in order to qualify for the most loan,” recommends Eric Bowlin, from ericbowlin.com.

Get Creative

“When it comes to having a large enough down payment, sometimes it simply takes some creative thinking and the willingness to sacrifice a bit. In other words, some people have access to more money, but haven’t always figured out where that money is.

“Here’s an example: A family has two late-model cars. The convenience is nice, but the possibility of selling one of the cars may not really cause a huge problem. Sometimes one car can serve two adult drivers. Sometimes mass transit is just as good and inexpensive as driving, finding a parking place, and paying for it. And sometimes car-sharing and ride-sharing services can be every bit as convenient as driving. Biking some places also is a good alternative.

“If the car is owned outright, the proceeds from the sale can go directly into the down payment. If the car is not paid off, the debt can be settled and the monthly payments can be diverted into the down payment account. And there ultimately may be a credit score benefit to having paid down that debt, but double check with your mortgage broker first. Sometimes doing good things like paying off debt actually dings your score in the short term,” suggests Ron Rovtar of Cherry Creek Properties.

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Time Works For (and Against) You

Ultimately, time may be the best remedy for your “borderline borrower” status. Time allows your credit to improve, your bank account to grow, and your debts to (hopefully) become smaller.

However, time also allows housing prices to increase and competition to grow. The sooner you start repairing your credit, start paying down your debt, and start saving for your down payment, the sooner you can start building your real estate empire.

Have you successfully applied for a mortgage with marginal credit/significant debt/low or no money? What are your best tips for overcoming these negatives for loan approval?

Leave your comments below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.