Getting a mortgage loan with bad credit

Years ago, borrowers with imperfect credit histories could only get mortgage loans with high interest rates. Sometimes, they couldn’t get mortgage loans at all. More recently, changes within the industry have allowed bad-credit customers access to better rates and terms.

Previously, borrowers were lumped into one of two broad categories: those with good credit, and those with bad credit. Credit scores, which are numerical representations of customer credit histories, were pretty much the deciding factor when it came to what interest rate a borrower was offered. If a borrower’s credit score was below a certain cut-off, they could only access subprime (high interest) rates.

The premise of this classification system was that borrowers with blemished credit were riskier than borrowers with good credit. Lenders believed that people were more likely to pay late, or worse, not pay at all, if they had credit problems in the past.

Over time, as computers became more sophisticated, lenders began to realize that their classification system was not as accurate as it could be. Technology made it possible for them to conduct more sophisticated analyses that could factor in more variables. Credit scores were still important, but they were no longer the sole basis of lending decisions.

This more intricate classification system is known as risk-based pricing. Risk-based pricing has made it possible for two borrowers with the same credit scores to receive different interest rates depending on all of the details of their personal circumstances.

Of course, you should always try to sort out blemishes on your credit report before you apply for a mortgage loan. If, however, your problems are relatively minor and your income is stable, you may still be able to get a decent interest rate.