- 1). Access an updated credit report to see exactly where you stand on the credit spectrum. Visit the Annual Credit Report website for a free copy. You should also purchase a copy of your FICO score. This three-digit number between 300 and 850 represents overall creditworthiness. Poor credit is a FICO below 600.
- 2). Find positive aspects that you can highlight on a mortgage application if you have poor credit. These can include large assets (retirement funds, investments), strong income and a low loan-to-value (LTV, or the value of a mortgage versus the value of the home).
- 3). Calculate your debt-to-income ratio (DIR). This is the percentage lenders use to determine your ability to repay a second mortgage. Divide the total of all monthly bills by your gross monthly income. A DIR less than 35 percent will help grease the skids if you have bad credit. A mortgage application with a DIR above 40 percent is considered risky.
- 4). Calculate your LTV. Divide your mortgage balance by your home's value. A low LTV is 80 percent or lower. This, too, will encourage lenders to look favorably on a second mortgage application--even with bad credit.
- 5). Research finance companies only. Banks, credit unions and mortgage brokers will only service customers with at least good credit. You will need a non-traditional lender, one who is willing to take a risk on a second mortgage--for a hefty price.
- 6). Compare all loan offers after you apply to two or three lenders. Pay close attention to origination fees, discount fees and closing costs. These will be high, but any percentage fee over 4 percent--while legal-- is considered to be unfair, according to most experts (especially those at the Federal Trade Commission).
- 7). Pay off delinquent and bad debt with a second mortgage. While you will have to pay to get the loan, you should use it to improve your credit score. With improved credit you can refinance the high-interest second mortgage in the future.
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