Can you qualify for a mortgage loan if you don't have a long enough credit history to even have your own three-digit credit score? Probably not. But there is hope, if you're patient and...
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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.
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