How to Shop for a Loan with Bad Credit

Just because you have bad credit (or think you do) doesn't mean you'll necessarily get turned down for a loan. Having a low credit score doesn't mean you're an undesired customer. In fact, many lenders do want your business, provided your credit isn't rock-bottom.

Check Your Credit Report and Score

You should already be checking your credit report for inaccuracies since a good majority of credit reports contain errors. But it's also important to find out what your credit score is. The higher it is, the better interest rate you can get and knowing your credit score can give you a better idea of where you may stand.

How to Improve Your Credit

Whatever you do, it's always a good idea to take steps to improve your credit. Here are some things you can do to help raise your credit score:

  • Pay your bills on time--this is the most important thing you can do to improve your score and the one that will impact your score the most.
  • Pay off debt rather than shifting it from one card to another.
  • Don't open and close multiple credit accounts in a short period of time--lenders generally view this as irresponsible use of credit.
  • Don't close existing credit accounts--this will not remove the debt from your record or credit history.

Shopping for a Lender

Generally speaking, the lower your score, the higher risk you are to a lender. If you have bad credit, it may be even more important to shop around because your rate will be a little higher than for someone with better credit. Many lenders will accept a credit score as low as 620, though some have been known to accept scores as low as 580.

Look for a lender who will not only give you a better rate, but also one who won't charge exorbitant fees and one who will treat you with respect and compassion. Make sure the lender you choose can answer your questions with intelligence and authority and will not ask you to do anything you are uncomfortable with. There are many borrowers out there who shopped around and were happy to have found a very low rate, but regretted using a particular lender because of the way they were ill-treated.

Also, try not to take too long to shop around for a mortgage. Each lender you contact must pull your credit to find out what loan you qualify (or don't qualify) for. Any number of credit pulls done in a 30-day period count as one inquiry and won't necessarily impact your credit score. However, say you apply with one lender one month, then another the next month, then a third the month after that, then they count as multiple inquiries and will begin to negatively affect your credit score.

Other Tips to Remember

Because you'll be paying more in interest, you'll need to find ways to save money. Try to find a loan that doesn't charge pre-payment penalties--fees charged for paying off your mortgage before the specified loan term is up.

Be aware, too, that home loan interest and points paid to reduce your interest rate are usually tax-deductible. Please check with your tax advisor to see what you may be able to write off on your taxes.

Some loan programs allow for you to also roll your closing costs into your mortgage. Ask your lender if this is possible. If so, you can avoid paying your closing costs immediately out-of-pocket and be able to pay them over the term of your mortgage.

Shopping around for the right loan and the right mortgage lender is always important, but probably more so if you have bad credit. Take steps to improve your credit and shop around for a lender who not only gives you a good rate, but also gets you the mortgage that fits your needs and your situation.