Bad Credit Mortgages

If It Happens to You

If you have bad credit and are trying to secure a mortgage, it may seem like an impossible situation. Home prices are high and if you already have poor credit, the fact that you need to be approved for such a high loan amount can be an added difficulty. However, there is hope. There are many programs available today to help people with bad credit obtain mortgage financing.

Benefits to Qualifying for a Bad Credit Mortgage

Having good credit affords more home loan options, but luckily, many Mortgage Lenders understand that bad credit happens, thus many are willing to offer home loans to people with low credit scores, but at a cost. Interest rates on bad credit loan mortgages are normally significantly higher than prime. Of course, the best way to improve your odds of getting a low interest rate is to boost credit rating. Still, it is possible to get approved with poor credit. Here are a few benefits to consider when applying for a bad credit mortgage:

• Mortgages for those with bad credit do have advantages that conventional mortgages don't. The prime advantage is that they are easier to qualify for, even with a bad credit history.
• Bad credit mortgages (also known as sub-prime mortgages) allow you to build equity with your home purchase even if you have a bankruptcy or foreclosure in your past.
• With interest rates only a couple of points above conventional rates, you may be able get into a home with no or little cash down. For about the cost of a rent payment, you can enjoy tax deductions and home ownership.
• Without waiting for your credit score to improve, you can buy a home at today's prices. Even though no one knows for certain what prices will be in the next couple of years, more than likely they will continue to go up. As they appreciate, your equity in your home continues to rise.
• By responsibly handling your mortgage payments, you can help repair the damage done to your credit history, which in turn will qualify you for a lower interest rate, should you choose to refinance your home in the future.

Tips to Qualifying for a Bad Credit Mortgage

Here are some things you can do to aggressively help you qualify for a mortgage loan even with a bad credit history:

Credit Report and Score

Obtain a copy of your credit report and score. Please note, you will not lose any credit points for checking your own credit report. You will lose some points if there a number of credit inquiries for such items as credit cards, auto loans, or department store credit cards applications. You will probably have to pay to get your credit report and score, but you will make it back many times over if you fix errors in your credit history; thereby increasing your credit score and lowering the interest rate you will be required to pay on your mortgage.

The three credit reporting agencies are Experian, Trans-Union, and Equifax. Since some lenders only report to one of these companies, you will probably have three different credit scores, and need to verify your history with each agency. Credit scores are calculated based on a formula developed by Fair Isaac Corp, and is known as your FICO Score. Your credit score is determined by the following breakdown:

• 35% Payment history
• 30% Outstanding debt
• 15% Length of credit history
• 10% Recent inquiries on credit report
• 10% Types of credit in use

Look over your credit history and make sure everything is reported accurately. If you see something wrong, make sure you dispute it with the agency and/or contact the creditor who reported the erroneous information.

If you have a very low credit score, it may take some time before you notice a major credit score increase. Still, you should start improving credit early. Raising your credit score by a few points may qualify you for a better interest rate in the future.

Seller Carry-Back

If you are looking for a house to buy, try to find a seller who is motivated to pay closing costs or carry-back a percentage of the loan. If you find a seller who is motivated to work with you, that may help you get approved for a bad credit mortgage. If the seller can pay your closing costs, this can free up that money that can be added to your down payment. If the seller is willing to carry-back a percentage of the loan then the loan-to-value may be low enough that the lender may consider that as good as a down payment.

Increase Your Down Payment

Borrow or ask for a gift from relatives toward a down payment. Keep in mind, however, if you borrow money from relatives, you will need to disclose that to the lender before you close. Lenders usually have regulations about where the down payment comes from and if you are dishonest, it could be considered defrauding a lender. Additionally, any loans from family and friends will be calculated into your debt-to-income ratio and could potentially prevent you from qualifying for a loan.

In Conclusion

With more and more financing companies offering sub-prime lending, it's easier than ever to find bad credit mortgages. A quick search online will yield hundreds of opportunities. Sifting through those results can produce some very favorable financing offers.

If you are overwhelmed with the choices, start with a mortgage broker, who will sort through your financing options and present you with the best selections. In some cases, they also offer special deals not found elsewhere.