Home Loans Options for Those with Bad Credit
For those with bad credit, getting a home mortgage loan can be difficult and expensive. Look out for lenders who promise the moon to poor credit customers, and follow these basic steps to get on the road to safe and affordable home ownership.
Beware subprime lenders
Many lenders have a "seasoning" period after which they will consider lending to someone with a bankruptcy or foreclosure in their past, usually two to three years. Subprime lenders, however, often offer no delay in granting loan approval. There may be a good reason for that flexibility -- predatory practices -- so proceed with caution.
The term "subprime" means less than prime -- a less-than-ideal borrower, and often, a less-than-ideal loan. A number of subprime lenders are divisions of larger lenders, but some are unethical businesses looking to target desperate customers with tempting offers that carry dangerous small print. If it sounds too good to be true, it probably is.
Try instead, for a conventional, fixed-rate loan from a conventional, reputable lender, knowing beforehand that you will have to provide more documentation than a borrower with higher credit, pay higher rates and possibly face a pre-payment penalty.
Whichever route you choose, try to compare options among three or four lenders, and read the terms and conditions of your loan offer carefully! High interest rates and stiff penalties for late payment will land you right back in a financial crisis and could jeopardize your home. MTGProfessor.com has a list of guidelines on what to watch out for. http://www.mtgprofessor.com/A%20-%20Type%20of%20Loan%20Provider/what_is_a_sub-prime_lender.htm
Look out for that ARM
Some lenders will offer adjustable-rate mortgages (ARMs) as options for customers with poor credit. These loans carry a known interest rate for a fixed period and then start to adjust based on market factors, usually one month to five years. Read carefully to see what the terms are and consider whether it's really a better deal to face the future increase for a low rate now or to pay slightly higher interest for a fixed-rate loan.
Know your credit report
Before you start applying for loans, check your credit report to make sure that the good and the bad are all reported accurately. If bankruptcies or foreclosures are showing as unpaid or as some other unresolved status, it could be hurting your score. Make sure that all paid loans are showing as such and that closed accounts are actually closed. You can get credit reports online from sites such as this one: http://www.equifax.com/free30daytrial/
Increase your score
The best and safest thing you can do to assure a reputable mortgage loan with less-than-great credit is to beef up your credit score. Every account that you can pay off will improve your rating. You can also obtain a letter from the account holder, notifying your potential lender that your account is paid off.
Decreasing your debt-to-income ratio (DTI) is in important step in boosting your credit, so do what you can to pay down existing balances. Once you can boost your score above 600, your loan options increase considerably.
Lenders will consider your DTI, as well as income history, asset projections and even where you'll be buying a home to decide how much you qualify for. Lenders also consider credit behavior and credit repayment records, so the more you can do to show good credit sense, the better you'll look on paper.
Have a co-signer
You might consider having a family member or someone close to you as a co-signer on a loan. That way, their good credit can offset your score, delivering a lower interest rate and better terms. Consider this step carefully, however; any mistakes on your part regarding loan repayment will impact their credit history.
Getting a mortgage loan without good credit is not impossible, but does require persistence. Focus on repairing your credit, shopping around for a safe loan and always read the fine print. With some patience, you will be able to find the right mortgage loan for you.
