When you're looking to buy a home, bad credit can do more than just make it harder to get a mortgage loan. It can make your life more difficult and costly in ways that may never have...
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Bad Credit Mortgage
By Kirk Haverkamp
Updated and reviewed May 29, 2013
Many mortgage companies are reluctant to finance people with bad credit or no money for a down payment. But certain mortgage lenders are willing to work with people who have a bad credit score, low income or face other obstacles to getting a loan.
A bad credit mortgage lender can help you get your loan approved, but there is a price to be paid. The loan you get will have a higher interest rate and closing fees than mortgages offered to borrowers with a better credit profile.
Where to find poor credit lenders
Bad credit mortgage lenders fall into several categories. The first are simply regular lenders who deal in products such as FHA or VA loans, which have less stringent credit requirements than conventional mortgages. These include much shorter minimum waiting periods after a foreclosure, which can be as little as 2 years for a VA loan or 3 years for an FHA mortgage.
Another type are small banks and credit unions, which may have more flexible lending standards than the big national banks and mortgage companies. Often, these focus on serving a local community or region where they know the housing market and local economy very well, so they don't take a "one-size-fits-all" approach to evaluating borrowers for loans.
A third way to get a bad credit mortgage is through a private lender. Rather than a bank, this may be an investor, a private lending company or even a person of your acquaintance. The costs for private mortgages are higher than for conventional home loans and the rules are different as well - it's highly advisable to consult with an attorney when arranging such a loan. Private mortgages also tend to have fairly short terms, such as five years, with a balloon payment at the end.
Shopping for a bad credit mortgage
It is advisable to check the rates with several bad credit lenders and compare. Even though you have to pay a higher rate, find the one that has the best rate and most favorable terms. Don't forget to take into account closing fees and other loan terms - those can have a significant impact on the cost.
A broker can be very useful when shopping for a bad credit mortgage. Brokers don't issue loans themselves, but instead work with a large number of lenders to try to find the best loan for you. Because they're familiar with the credit requirements and mortgage products of these various lenders, they can often find a lender who'll approve you much faster than you could find one yourself.
Some bad credit loans carry a pre-payment penalty. This means if you pay off the loan sooner than expected - say you refinance within less than 3 years - you have to pay a penalty so the lender can recoup the interest payments it was expected. It's a good idea to avoid these when possible, but some lenders may demand them when you're looking for a bad credit loan.
Improving your credit
You can also try to improve your credit score so that you can qualify for a mortgage or obtain a better rate and terms down the road. Many people don't realize that the impact of most negative items on your credit report begins to fade after about two years, although foreclosures and bankruptcies will stay with you longer. Otherwise, you should be able to see a significant improvement in your credit score simply by keeping up on your bills.
How much you owe also affects your credit. Lenders don't like to make loans to people who are already loaded down with other debt. Avoid carrying a balance higher than 25 percent of your limit on any individual credit card, and preferably even lower. Keep your total debt under control - it'll be easier to get a mortgage if your debt payments are no more than 10 percent of your monthly income.
Give credit to your credit score
Your credit score is key to obtaining a loan. If you have a high score, you're likely to be approved and receive a favorable interest rate. If your score is low, the opposite is true. Not only will it be more difficult to get loan approval, if you do, the interest rate will probably be higher. There are ways, however, to jump over the hurdle of a low credit score.
Sub-Prime Mortgage Loans
A bad credit score does not doom you to failure. There's a special category of mortgage lenders who specialize in making high-risk loans to those with no credit, little credit, or bad credit. These lenders are called sub-prime lenders, or non-conforming lenders.
Depending on the credit issues involved, the lender will "grade" your credit, and assign you a letter score, with "A" being exemplary credit, and "C" or "D" meaning serious credit problems.
Even if you receive a poor grade, you don't have to accept the first lender who's willing to grant you a loan. Since competition within the sub-prime market is intense, the option exists to carefully compare rates and find the most attractive one possible.
Financing Options to Consider
If you're in better financial shape now than when your credit problems occurred, you may want to consider an adjustable-rate mortgage (ARM). With an ARM, you can get a lower interest rate for a short period of time, usually about two to five years. However, with a history of poor payment, there may be a prepayment penalty that equals six months of interest.
If you keep up your payments, you'll prove to the lender that your credit habits have changed for the better. Then, you can refinance when the initial period has passed.
This isn't a wise option to consider, however, if you see possible financial problems looming ahead. If this is the case, you'll want to go with a fixed-rate mortgage so that your financial obligation remains constant from month-to-month. Don't let your less-than-sterling credit make you give up before you start. You do have options. Research your choices and do some homework. But most importantly, never lose sight of your dream of owning your very own home.
Bad credit vs. no credit
Somewhat different from the problem of bad credit is no credit - that is, someone who's never or rarely used credit cards, had an auto loan or made any other type of installment payments on a debt (monthly payments for things like utilities or cable TV typically don't affect your credit).
To build credit, you can try to get someone to co-sign a loan for you (good for autos) or try to obtain several credit cards where you charge small amounts and pay off the balance each month (don't let it accumulate!). If you have trouble getting approved for a credit card, a secured card, which you back by posting a deposit of several hundred dollars, may be an option.
Bad Credit Mortgages with No Down Payment
Bad credit is no fun, especially when you're applying for a home mortgage. Fortunately, there are lenders who specialize in bad credit mortgages. By working with these lenders to accomplish debt management, you can turn the tide of bad credit history.
No money down
The most popular source for bad credit loans is the "sub prime" lender. These mortgage companies deal almost exclusively with borrowers who have poor credit, bankruptcy, and other debt management problems. They even offer financing with no money down, great news for those trying to buy homes when real estate prices are high. Expect to pay higher interest rates in return for the risk the lender is taking by providing a mortgage to someone with less than stellar credit. That's often a small price to pay for the security of home ownership. After you get back on your feet, of course, it's always possible to refinance into a conventional type of loan at more attractive and competitive rates.
Qualifying for bad credit mortgages
A credit score of 600 or higher will put you in a better position for borrowing. If your score is lower, you can still qualify for a bad credit mortgage if you have large cash reserves. If you can demonstrate that you have enough extra savings to support yourself and pay your outstanding bills for six months or more, you can make a strong positive impression on a lender. You might also obtain an 80/20 loan, which lets you borrow your principal plus your down payment, effectively creating a zero-down transaction.
Even if you're doing business with a major bank, be sure to ask if they give bad credit mortgages. Almost all the big banks offer this kind of loan, so you have many options to take advantage of. There's no need to hide those skeletons any longer. A bad credit mortgage can help put the meat back on the bones of your credit, and turn your rating healthy once again.
Bouncing Back from Bad Credit
Time may heal all wounds, but in the case of a bad credit history, there are a few other methods of financial first aid. These include paying bills on time, using your charge cards in a healthy way, and cleaning up your credit report.
Resiliency is a defining trait among winning athletes. The player who loses, but learns from his defeat, will win big in the long run. What holds true for the world of sports also applies to a consumer's financial world. A setback such as bad credit can inflict significant short-term damage. If you learn from your mistakes, however, you can develop solid financial skills over the long term. Here are some tactics that can help you bounce back from bad credit
Improve your bill-paying system
Making late payments on your credit cards, home mortgage, or car loans will lower your credit score. If you find that you lack the organizational skills to keep your bills straight, it's time to develop a payment system.Don't create anything too complex-the key is to devise a system that's easy to follow. Consider paying your bills the moment they come in the mail, or sitting down on the first and fifteenth day of each month and writing out checks. Also consider creating a budget. It will help ensure that you have enough money in your bank account when those bills come due.
Use credit cards wisely
Credit cards should only be used for convenience and to take advantage of rewards programs. If you need to buy something, think of the card as a check. Only use it if you fully intend to make the entire payment at the end of the month. If you view plastic as a personal loan, you'll soon find yourself spending hundreds of dollars on double-digit interest rates. Pay off your balances in full each month, and you'll avoid finance charges. You can also apply for a card with a rewards program. If you make your payments on time, you'll come out ahead with the rewards that the card pays out.
Clean up your credit report
It's not uncommon in this high-tech world for a mistake or two to appear on your credit report. If a late payment was reported erroneously, it could lower your score-all without your even knowing it. Be proactive and contact the three credit bureaus-Equifax, TransUnion, and Experian-for a report. Examine it carefully. If you find mistakes, contact the bureau immediately. Simply by cleaning up one or two mistakes, the score on your report could rise, and you could find yourself qualifying for better loans.If you have bad credit, you've taken a few blows to your ego and your pocketbook. But that's past history. Now, make your payments on time and form some good financial habits. Very soon, your credit score will bounce back-and so will you.
Be Proactive to Avoid Bad Credit
A positive outlook can make the world a much more pleasant place. But sometimes, it's hard to look on the bright side of life when you have bad credit. Your best bet is to be proactive and steer clear of bad credit before it happens.
Barney Fife, the tough-talking deputy from the classic television comedy The Andy Griffith Show, believed that the best way to curtail crime was to "Nip it in the bud." The policeman's wisdom extends to the financial realm, as well, because bad credit can be avoided if you stop it before it starts. Here are some simple ways to do just that.
Credit cards-loans, not cash
Credit cards can be disastrous, especially if you view them as cash instead of what they truly are-loans. A credit card company will extend you a line of credit, but the moment you tap into it, you'll start paying interest on the balance, with rates often higher than 10 percent.
If you're going to use your credit card, treat it like a checkbook. Make sure that you have enough money in the bank to pay off your charges at the end of the month. If you wind up carrying a balance, your credit score will go down.
Too many cards, too much trouble
Your mailbox is probably jam-packed with offers for new credit cards. While it may be tempting to pump up your wallet with plastic, you're only asking for trouble-and a lower credit score. Credit bureaus, the organizations that assess your overall credit score, keep tabs on how much plastic you have available to you. If you have a number of lines of credit and carry unpaid balances on each, expect your credit score to plummet.
The ideal scenario is to carry only two or three cards. Make one of them a rewards card, and use it for everyday purchases. This will allow you to accumulate points, provided that you pay off the balance at the end of the month. Keep a second piece of plastic on hand as a back up.
Not a wise financing option
Never use your credit card as a financing tool for big purchases like appliances. A more prudent choice would be a home equity line of credit, which will give you a lower, tax-deductible interest rate. You could also try saving money for a big purchase, and when you've got enough cash, use a rewards card to make the buy. Then, take the cash you've been saving, and pay off the entire balance at the end of the month. You'll gain the rewards points, and pay off your balance in one fell swoop.
Bad credit is like a garden weed. It slowly grows all around you, and if you don't "nip it in the bud" early and often, it will overgrow your personal financial garden. Being proactive-especially when it comes to using your credit cards-is a smart way to avoid bad credit.
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