The recent economic conditions have left many individuals unable to qualify for traditional mortgages. For those needing mortgages for bad credit, there are options and programs out there that can help make home financing a reality.
Generally, people with troubled credit histories and/or poor credit scores qualify only for mortgages with astronomical interest rates, known as “subprime” mortgages, or they are unable to procure financing at all. This is because lenders scrutinize credit history and credit ratings as a predictor of a borrower’s future ability to pay a mortgage loan back on time and in full.
Incidents that tarnish a borrower’s credit history and credit rating include frequently late or missed payments on previous mortgages, school loans, auto loans, personal loans, or credit cards; credit accounts taken over by collection agencies, unsound banking accounts including a high occurrence of bounced checks; bankruptcies, foreclosures, tax liens, and repossessions. Another event that hurts a borrower’s credit history and credit rating is the “hits” those financial records take when a creditor looks at a borrower’s history or score to consider them for credit.
The more creditors a borrower has looking at his or her credit history and score, the more “hard hits” or “hard inquiries” that record takes, and the lower the score becomes. More specifically, one or two of these hard hits over the span of four to six months may not adversely affect a consumer’s credit score. However, five or more hard hits in that same span of time will indicate to potential creditors that the consumer is in desperate need of money and is trying to borrow from multiple lenders, signifying potential financial troubles, and making them less apt to lend to that individual. With this in mind, it is favorable for borrowers to do their rate shopping within fourteen days to minimize the appearance of score-lowering hard hits. Credit scores in the mid-600s and under generally fall into the “less than perfect credit” category, and mortgages and other forms of credit for such scores usually come with higher interest rates or other difficult terms to offset the credit risk for the lender.
On the other hand, “soft hits” are the inquiries a borrower makes into his or her own credit history and rating. These hits do not affect a borrower’s credit history or rating adversely; in fact, they have the opposite effect. Lenders who see borrowers who regularly check into their own credit history and score are more likely to lend to those individuals because they tend to be more fiscally responsible. For whatever reason a borrower has a less than desirable credit history and score, getting back into fiscal fitness by responsibly paying back a mortgage is a wise choice.
The first step towards getting a subprime mortgage is to find a responsible, dependable lender. One of the largest problems in recent economic history is banks writing millions of dollars in unstable mortgages. When looking for a reputable lender, begin by looking locally. Check the newspaper for local banks’ interest rates on mortgage loans for people with bad credit. For those in the subprime market, an interest rate between 8% and 10% versus 4.6% in the traditional market is not unheard of; it is costly, but that higher interest rate is one of the facts for those seeking a loan with problematic credit. Also, look for local lenders who advertise help for individuals with less than perfect credit. Going with a local lender is beneficial because there is a local office to visit, a person the borrower can talk to, and bankers at local financial institutions have a better feel for the local economic climate.
The next step is to widen that search area.
Look outside of the immediate area for lenders and into the nearest larger metropolitan area. For those in the northern and central areas of Colorado, Denver is the next mortgage for bad credit lender market. Expanding the search area still allows borrowers the reliability of a local office and a person of contact, but with larger banks in a more populous area the chances of the institution having programs specifically created for those with problematic credit is much higher, increasing their odds of approval. Many of the national banking institutions offer specific mortgage lenders for bad credit programs tailored for borrowers with less than perfect credit, so while going local has some advantages, going national does as well.
Once borrowers have chosen a few possible lenders, it is time for them to discuss interest rates, points—a form of pre-paid interest—down payments, private mortgage insurance, and the details of any specific loan programs. One of these details will more than likely be the deciding factor on choosing one lender over another. And while borrower-specific interest rates are calculated on a case-by-case basis, some of the more popular mortgage loan programs for those with less than perfect credit include 100% financing for individuals with higher but still less than perfect credit scores, and 80% financing for those with FICO scores of 620 or higher and stated income. This means that some individuals may qualify to borrow the full cost of their desired home loan, while others may have to pay 20% of the price as a down payment. Some lenders are even offering FHA loans for those with lower credit scores but who do have two years of consecutive employment.
Borrowers need to be open and honest with their potential lenders as to why their credit is troubled. In cases of divorce, illness, the death of a spouse, or temporary unemployment where borrowers can demonstrate the difficulty was in the past and they are working on getting their financial situation back in order, lenders may be more willing to lend than in cases where borrowers simply were living beyond their means. Being honest upfront is a wise policy.
It does not take perfect credit to qualify for a mortgage. In today’s economy, it is significantly more difficult for individuals with less than perfect credit to secure trustworthy loans, but it is possible. By searching local and national markets to locate a reliable lender and obtaining all of the details about their loan programs, borrowers can make an intelligent decision as to how to secure their financing. Making intelligent decisions is the first step towards financial fitness.
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