Steps to Take if You’re Turned Down for a Mortgage

2 Min. Read

Alternatives When You Can’t Buy a House with Bad Credit

A low credit score doesn’t have to prevent you from reaching your dream of owning a home. If your credit score is damaged and you’re not sure if you can qualify for a mortgage loan, there are steps you can take to put yourself on the path to ownership. Here, we’ll explore alternative options when you can’t buy a home with bad credit.

Improve your credit score.

If your credit score is lower than 500 or you’re worried about being able to make mortgage payments, it’s best to improve your credit score before buying a home.

How can you improve your credit score before applying for a home loan? Here are some tips:

• Pay off your current debts
• Improve your payment history by paying on time when you can
• Lower your credit usage to 30% or less (e.g., never owe more than $300 on a $1,000 limit credit card)
• Don’t apply for new credit if you have opened a new account in the past three years

You can read more about understanding credit and how to improve your credit report here.

Consider a co-signer.

A co-signer is another person who shares responsibility for making loan payments in addition to the primary borrower (in this case, you). Co-signers legally promise to help pay back the money borrowed if the primary borrower cannot make the full payment.

Your co-signer might be a family member who agrees to help you with loan payments. Not all lenders allow co-signers, so it’s important to ask specifically about co-signing agreements.

Research financial counseling programs like Finding HOME.

At Marine Credit Union, we believe financial education and homeownership create opportunities for personal stability and community growth. Finding HOME is a free program offered to anyone who wants the opportunity to own a home and achieve financial security.

The Finding HOME program is offered through the Marine Credit Union Foundation and provides free financial education to individuals and families. Upon graduating from the program, Finding HOME guarantees access to a market-rate mortgage that fits your budget.

Check out Finding HOME to see if it would be right for you, or research other state and local programs that may be able to help.

What about a personal loan?

Lenders don’t easily allow personal loans to be used for payments in the mortgage process. Using a personal loan for real estate won’t have the same tax advantages, and personal loans tend to have higher APRs and interest rates, meaning you’ll end up paying a lot more over time.

What’s the bottom line?

Buying a home, especially with bad credit, can be an uncertain process—but it isn’t impossible. If you have bad credit and want to buy a home, don’t be discouraged from seeking advice for your current situation.

There are many types of loans you can apply for, but make sure they fit your financial situation. Loans backed by the government—like FHA loans, VA loans, and USDA loans—may be the easiest way to qualify for a loan when your credit score is between 500-640. Additionally, single family direct loans are inclusive for low- to very low-income households with low or no credit history. Just make sure to check out the additional requirements for each loan.