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Do you have bad credit and want to purchase a home? You can still qualify for a mortgage even with bad credit.
Typically, a mortgage lender will look at the age, dollar amount and your payment history on different credit lines. To put it simply, That means opening accounts frequently, running up your balances, and paying on time or not at all can impact your credit score negatively. Just changing one of these components of your spending behavior can positively affect your credit score. Also, bad credit does not necessarily mean you can’t get a home loan, it will just come at a higher cost.
Conventional home mortgages aren’t usually available to homebuyers with bad credit because they present a higher risk for the lender. However, the Federal Housing Administration can be a good resource for aspiring homeowners with low credit scores. The FHA doesn’t lend money, but it does act as a form of insurance for lenders by providing a guarantee that it will pay your lender even if you default on your mortgage. In a lender’s eyes, this approval reduces its risk of lending to someone with poor credit, and improves your odds of getting your mortgage application approved.
As you likely know, many lenders who catered to low-credit borrowers have gone out of business, but - there are still some out there. As mentioned above, getting a mortgage when you have bad credit can be very expensive. You may have to consider an adjustable rate mortgage simply because the interest rate on a fixed loan will be so high – much higher than any rates you’ll see advertised by local banks or online. This should help keep your mortgage payments low enough to be more manageable.
A word of advice - don't agree to a pre-payment penalty. Lenders may try to convince borrowers to go with a loan with a prepayment penalty. This is essentially a clause in your mortgage contract that allows the lender to collect extra money if you pay off the mortgage early or make extra payments above a certain limit to help reduce your debt. Not only can a prepayment penalty be expensive, but anything that discourages borrowers from reducing their debt is bad news. If you can pay more on your mortgage, do it – it can save you thousands. And don’t let the lender talk you into a deal that’ll force you to do otherwise.
If you have poor credit, one obvious way to improve your chances of getting a mortgage is to improve that score. This is a solution that takes longer, but even a small increase in your score can make a real difference. Order a copy of your credit score from all three bureaus– TransUnion, Experian and Equifax start looking for any inaccuracies. Disputing inaccurate information can give your score a significant boost almost immediately.
One thing that can make you a lower risk to a borrower is a big, fat down payment. If you have access to some cash, this can go a long way toward helping you secure a mortgage loan. After all, lenders need some assurance that they’ll get their money back. The more equity there is in the home you buy, the easier it is for them to do that. Plus, a higher down payment will mean that you won’t have to pay private mortgage insurance, which is required of homeowners who put down less than 20 percent of the cost of the home.
If you can find someone to co-sign for your loan, you could avoid a bad credit mortgage altogether. Keep in mind, however, that this agreement means that you will be putting a family member or friend on the hook for your debt. If you default, both you and your co-signer will suffer the consequences.
Of course, the best way to get a mortgage after you’ve don’t some damage to your credit is to wait until your score improves. This ensures that you’ll get the best possible interest rate on your mortgage, and will help you avoid the predatory lenders that tend to take advantage of borrowers with few other options. Besides, if your bank won’t give you a mortgage because your credit history suggests that there’s a high risk that you won’t repay the loan, you have to ask yourself whether that assessment is accurate given your financial background. A mortgage is a huge financial responsibility that spans many years.