Mortgages And Bad Credit: How To Improve Your Situation
What it Means Today
With interest rates hovering at the low end of the spectrum, the time is right for lifelong renters to consider buying a home, as a mortgage plus taxes can often end up costing less per month than rent. However, these low interest rates also make it more difficult for renters with less than adequate credit to get approved.
A bad credit or sub-prime mortgage carries a different meaning than it used to, and what is presently considered a bad credit rating is much higher than it once was. New federal regulations on the sub-prime market, and the recent plight of current homeowners falling into default and foreclosure are making lenders cautious about approving mortgages to buyers with low credit ratings.
While it is difficult to receive approval for a mortgage with bad credit, a bad credit score does not have to be the end of the line. There are still many lenders who are very willing to give loans to buyers with less-than-exceptional credit, and, at very least, most are happy to advise on how to improve a bad credit score or even shape up a mediocre score. In the interim, what follows is a short list of suggestions to help a potential homebuyer who has been rejected by a bank or major lender.
Look Past the Banks
Banks, by nature, are low-risk lenders, which means even if they do offer you a loan with a low credit score, it will probably be at an outrageous interest rate. Dont be afraid to look to other lenders. The Federal Housing Administration offers competitive mortgages for potential buyers who qualify, and is in the business of finding people housing.
However, if you have been with your bank for a long time and/or have had and maintained multiple accounts with them, give them a try. They might be willing to look beyond your credit score and consider you based on your history with them.
Decrease the Loan, Increase the Down Payment
Lenders are more likely to take a potential homebuyer with a low credit score seriously if they are able to provide more money up front or are seeking a smaller loan. One way to seek a smaller loan is to provide a larger down payment on the home. Both decreasing the loan size and increasing the down payment will increase your chances of securing the loan significantly.
One suggestion for increasing a down payment is to borrow money or receive it as a gift from friends or family. Put it in an account while you shop around and try to improve your credit score. This will show lenders that you are capable of saving and managing money and suggest that you are a lower risk than your credit score might indicate. Lenders factor in how long you have had your down payment when they check your credit.
Shop Smart
While it is important to compare quotes and get the best possible rate, when doing so, be sure to ask for a quote credit check and not a full credit check. Each time a potential lender runs a credit check on your behalf, it puts a little dent in your credit rating. Enough dents in an already bad rating is less-than ideal for a hopefully buyer with shoddy credit. Quote credit checks show up differently than full checks, will not prevent you from shopping, and will allow you to get the score you deserve.
That said, look into as many different options as you can. Be an educated consumer. That alone will instill confidence in some potential lenders you may speak with.
Know Your Credit Score
Every citizen is entitled to one free credit report a year. Use it. Get a copy and observe any debt and any negative information on it. Where there is debt, contact your debtors and set up payment plans to pay it down. Keep in contact with them to keep them from further damaging you credit score.
If you have bills that are past due, pay them current and try to stay current. Consistently paying them on time will improve your score as well.
Where there are negative marks, try to contact these companies and ask them to remove the marks. The worst they can do is say, No. In the best case scenario, they will remove a negative notation from your credit report.
Also, build your credit. Have a line of credit, but keep the balance low. If you have a line of credit, but dont use it, keep it open. Sometimes a zero balance will improve your score.
Lastly, dont get dispirited if your credit score disqualifies you from a mortgage now. Talk to lenders about what you can do to improve your score for their companies. Often, should you heed their advice, a mortgage is obtainable within as few as four months.
by: mor123
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