This is the third of ten articles running in the Minnesota Spokesman-Recorder between April-June 2023.

How can you qualify for a mortgage if you have bad credit?

The short answer is you can’t. But short answers don’t always tell the whole story.

The truth is, credit scores are simply a snapshot in time. They go up and down regularly based on actions you take. Most importantly, they can be improved if you know what to do.

The biggest mistake people make when it comes to fixing their credit is believing they need to pay for this specialized help. You should never pay for credit repair services, as they’re available to anyone, for free, through reputable non-profit community-based agencies.

When you engage this professional help, you’ll be guided step-by-step through a process designed to permanently address what’s holding your score down. Sometimes there are inaccuracies on your record that need to be challenged and removed. More commonly, there are one or two items that can be addressed directly in order to affect a substantial improvement.

Improving your credit score is not necessarily something you want to try doing on your own without specific knowledge. Because our credit system is complex and not very transparent, what might seem like a good move can actually end up hurting you.

Let’s say, for example, you have two or three old store-specific credit cards you no longer use. Contacting the vendor and closing these accounts would actually cause your credit score to decline, because the total amount of potential credit extended to you has now been reduced.

Another problem is having ‘no credit,’ or a ‘thin credit file.’ New arrivals to this country encounter this the most, as they have not been here long enough to establish a credit record. But it’s also another area where what might seem like a good thing actually ends up being a bad thing.

Let’s say you operate your personal finances on a strictly cash basis. You might not have any debt at all, since you can’t spend what you don’t have. But when it comes to a loan, you don’t have a credit record either, and so you’re not going to qualify for a mortgage. Credit repair professionals can guide you through establishing credit as well as repairing it.

So we know you need a good credit score in order to qualify for a mortgage and buy a home. But how good is an important factor to understand as well.

For simplicity’s sake, let’s start with the fact that the lowest credit score generally required to qualify for a conventional mortgage is 620. (Don’t forget there are other qualifying factors as well, such as your debt-to-income ratio.) While you might qualify at this level, your interest rate is going to be higher than it would be if your score was 740 (generally the level at which you can qualify for the best interest rate). Credit improvement in this range can have a huge effect on the amount of house you can afford, since less of your monthly payment will be devoted to interest. To illustrate, if you qualify for a mortgage with a monthly payment of $1,800, an interest rate improvement from 7 percent down to 6 percent will move you from being able to afford a $270,000 house to now being able to afford a $300,000 house – all for that same $1,800 monthly payment.

Buying a home is one of the biggest financial transactions you’ll ever make. But you don’t have to navigate the home buying process alone. The Minnesota Homeownership Center and our partner advisors are here to help with homebuyer education classes and free, nonbiased, one-on-one advisory services that include credit counseling and repair. These services are accessible and available to everyone, free of charge.

Homeownership is possible. We can show you how.