It is still possible to get a mortgage with bad credit by exploring certain options.
Individuals can obtain a mortgage with bad credit. The process is similar to applying for any other type of mortgage loan. Individuals should shop around in order to get the best rates. With some loans, a higher interest rate may apply and a larger down payment may be required. However, bad credit loans can help individuals restore their credit if properly repaid and they can help individuals gain a sense of financial achievement.
According to the United States Department of Housing and Urban Development (HUD), owning a home is possible for individuals with bad credit. Lenders are available to help, but such applicants must keep in mind several factors when they submit an application.
Similar to a person with an excellent credit history, individuals with a poor credit history may apply for a mortgage loan through a bank, credit union or mortgage company. Lenders will then advise individuals of the different types of loans for which they may qualify. The mortgage application provides the bank or the lender with data about the applicant, including credit history, income, debt ratio, employment history and other pertinent information. This information is used to determine loan qualification.
Lenders evaluate an individual's credit score to help determine loan eligibility. Individuals with credit problems should periodically review their credit history to check the accuracy and completeness of their credit report. The report will also show if any negative information is being reported to any of the major credit bureaus.
Individuals may order a copy of their credit report by contacting:
The Federal Reserve Bank of Boston advises individuals to familiarize themselves with the different types of loans, the terminology within them and how they work.
Some home mortgages may be appropriate for one individual, but inappropriate for someone else. It is important for individuals to understand the loan agreement and the terms of the agreement. An interest-only loan may work for an individual who only plans to stay in a home for a short time, but that is not always the best choice for everyone.
Individuals with a low credit rating or a high debt ratio may be limited in regard to the types of loans for which they can qualify and the amount of money they can borrow. Additionally, the down payment amount may be higher. Interest rates are also higher, as much as 20 to 25 percent for the loan. In contrast, individuals with a good credit history may qualify for much lower interest rates and loans that require little (an average of three to five percent) to no money down. Pending approval is based on employment status and income, findings on a credit report, amount of debt, assets, and the amount of available cash for a down payment.
The application process begins when an individual meets with a lender and applies for a loan. Lenders and bank personnel work with individuals and explain what is necessary to complete the loan application. Individuals may be asked to produce a variety of documentation, such as W-2 forms, employment and credit history, savings and banking records, and so on.
After reviewing all the documents, lenders explain the potential loan options and present individuals with different types of loans they qualify for. They also advise individuals about various aspects of the loan including the amount necessary for a down payment, payment schedules and repayment options.
Before signing a loan contract, it is best to have a family member, friend or a legal professional review the contract to make sure the terms are acceptable to the applicant and to verify that none of the information has changed since the initial application.
It is important for individuals to consider how they will repay the loan. Repayment options typically fall into two categories: interest-only and interest plus principal. An interest-only payment keeps interest low and the payment affordable. However, it does not allow individuals to pay debt off as quickly, and it accumulates long-term.
The interest plus principal payment allows individuals to pay off the loan quicker. Payments are made toward the principal and the interest.
Lenders also inform applicants of the current interest rates for various loans, according to HUD. Interest rates differ based on the repayment loan and the duration of the loan. Two types of interest rates are fixed and variable. A fixed rate remains the same throughout the length of the mortgage loan, while a variable rate changes based on national interest rates.
Individuals with bad credit should beware of predatory lenders. These lenders might be unethical if they try to charge large fees or recommend individuals to falsify certain information required for the loan application. The applicant should research a lenders background, especially if the loan is not through a reputable banking institution. It is important to remember that not all loans and lenders are the same. It is always best to shop around. Borrowing from a lender who offers a high interest rate loan or one who wants to use an individual's home for collateral can be risky. It can result in individuals losing money and the home.