If you’ve had a few financial bumps in the road it can be easy to assume that your credit is substantially damaged. Until you know the facts about your credit report and score and until you investigate the qualification guidelines of each type of loan, be careful about heading straight for a bad credit mortgage loan. When you decide to shop for a mortgage, be careful not to pre-qualify yourself. You may be able to qualify for better rates and terms than you expect – saving yourself thousands of dollars over the life of your loan.

What is bad credit? If your credit score is above 600, possibly even 580,  you may be able to qualify for a conventional mortgage. Before you assume you need to look for a bad credit mortgage or a subprime mortgage, you may want to investigate the various loan options available on the market.

Bad Credit Mortgage Lenders

Remember that there are different types of lenders. There are bad credit mortgage lenders, generally banks, and then there are bad credit mortgage brokers, usually independent firms that shop for the best deals among lenders. Not all lenders or brokers will offer all of the types of mortgages, bad credit or otherwise. It’s in your best interest to look at a few lenders, or a few brokers and try to qualify for more than one category before making your final decision. Ask each company you deal with about the types of loans they are able to offer. Remember they are unlikely to suggest a competing product to you if they do not carry it – even if it is a better program that you may be able to qualify for. It pays to shop around.

Alternatives to Bad Credit Mortgages

Here is a summary of some of the types of loans you may want to consider qualifying for.

Conventional Mortgages through Fannie Mae

Generally the least expensive types of mortgages, Fannie Mae provides good interest rates to those who qualify and have a good down payment.

Details and Qualifications:

• Your debt to income ratio must be no more than 31%.This means that what you pay in monthly debt payments cannot be more than 31% of your income each month.
• 2 years employment history
• Lender must be an approved Fannie Mae / Freddie Mac lender
• As of March, 2009 the highest amount you can borrow is $417,000
• The larger the down payment, the lower the interest rate
• A credit score over 580 is required
• Your property will be appraised once qualification looks likely – the appraiser will need to be certified by Fannie Mae.
• One of the least expensive loan options in terms of interest rates and closing costs.

FHA Mortgage Loans

One of the most popular mortgage types, FHA loans provide flexibility – but require a minimum credit score of 620.

Details and Qualifications:

• Requires an FHA-approved mortgage lender
• Minimum credit score of 620
• Minimum of 2 years employment history
• Stable or increasing income over the past 2 years
• No more than two thirty-day late payments on your credit report in the past two years.
• Bankruptcies must be 2 years old and your credit report must show good credit since then.
• Any foreclosure must be 3 years old or older with good credit since.
• The mortgage payment applying for must be 30% or less of your total monthly income.
• Many different FHA programs available including 100% financing options

Subprime / Bad Credit Mortgages

If your credit score is below 600, you may want to consider shopping for a subprime or bad credit mortgage financing. These programs are becoming more difficult to find, with the changing housing market and mortgage loan regulations – but they are out there.

Details and Qualifications:

• Generally a credit score of 620 or below
• Low down payment programs are available
• Typically higher interest rates
• Higher closing costs
• Employment and income requirements vary

Summary

Check on your credit score before you apply for a loan. Shop the various types of loans, and talk to a few different mortgage brokers or mortgage lenders. If you aren’t able to qualify for a conventional mortgage, shop several subprime mortgage lenders – don’t just settle for the first bad credit mortgage you qualify for. Once you have your mortgage, remember to use your time wisely – work to rebuild your credit within the first few years so you can refinance with better terms.

photo credit: MOmilkman