Buying home isn’t easy without a mortgage and getting a mortgage is quite difficult without a good credit. It is true that people with less-than-perfect credit have to face a lot of troubles in obtaining home loans at reasonable prices. However, the possibilities are not limited. You need to first understand your situation and then take an appropriate action.
The mortgage hunting process involves three steps:
- Shopping around
- Comparison of costs and terms
- Negotiation for the best deal
The above three steps are valid for even people with bad credit.
What is a Bad Credit Score?
The term “bad credit” signifies different meanings at different lenders. For conventional loans, a FICO score of 620 is generally taken as the lowest standard at most lenders. You are likely to obtain a mortgage loan if your credit score is in the range of 620-640, but the cost may be significantly higher than those getting a mortgage with a FICO score more than 750.
According to an estimate, a borrower with a near perfect credit score is benefited by about 1.5% in interest rate than the one with a poor credit score. This means the latter will have to pay an extra $100 every month on a loan amount of $100,000.
What if your score is less than 620? You are now in a situation when you find the options severely limited. If you can qualify you might be able take the help of a government-supported program, such as FHA-insured loans and VA loans. Such programs are helpful if your credit score is as low as 580. Note that these agencies do not underwrite mortgages, but insure mortgages issued by qualified lenders. You still have to negotiate for a better rate and terms.
Wait until your Credit Improves
Your score is even less than 580. You are now in the bad credit zone and you won’t find too many lenders coming to you with sensible options. If you can afford to pay a substantially high interest rate, then you may find a few lenders to help you out with home finance. A better alternative would be to postpone your immediate mortgage requirement and wait until your credit improves.
If you can continue paying your bills on time for two years, you will begin to see a significant improvement in your credit score. Don’t open new accounts and maintain all existing credit cards, using and paying in full, to give a boost to your credit rating. People who have faced foreclosures and bankruptcy may need 7 to 10 years to see significant improvement in their credit, but they become eligible for a new mortgage after three years of such an event.
What if you need a Mortgage now?
So, you can’t wait for two years or more. You want a mortgage now, but you are not willing to pay exorbitant cost. Here are some possibilities to explore:
- You are entitled to one credit report from each of the three credit reporting agencies – Equifax, TransUnion and Experian – in a year for free. It is important to check for errors in your report and get these corrected soon. You will immediately find lenders willing to offer you a suitable mortgage loan.
- Find a co-signer. A co-signer is someone who offers his or her name and credit standing to help you obtain a mortgage. Note that the co-signer will be liable for the full value of the mortgage.
- Apply for the loan in someone else’s name whose credit score is good enough to qualify for the loan. Your partner or spouse will come forward for your help.
- Find a credit union in your neighborhood and become a member. You might be able to obtain a mortgage at an affordable price despite bad credit.
Seek the help of a mortgage broker. These professionals maintain relationships with several lenders, so they might have a solution for you, at an added fee, of course.