Bad Credit Loan Resource » Bad Credit Mortgages

Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?

Owen — Fri, 04 Sep 2009 18:02:01 +0000

The decision of whether or not to repair your credit before applying for a mortgage or a mortgage refinance is a difficult one. Obviously, the better your credit, the better deal you will be able to qualify for. However, sometimes there is only so much repair that can be done and it can be quite time consuming. If you need to get into a house right away, or you have a deadline to refinance, you may need to compromise.

Get your Credit Report

You have to be informed. The first thing to do is to pull your credit report. You can do this through one of the major credit reporting bureaus, such as Equifax, Experian or TransUnion. If you have been denied credit recently, you may be able to qualify for a free credit report. There are also other agencies out there who specialize in free credit reports. When you do get your credit, be sure to select the type that comes with your credit scores – and if you can get scores from all 3 credit agencies so much the better.

Know your Credit Score

Some bad credit mortgage lenders go with your high credit score, others go with a blended rate. That is why it is important to know what your scores are.

What do credit scores mean?

720 and above: Excellent credit. You will probably be able to get the best rates available – and you should certainly shop around to get the best deal. You will most likely be able to borrow more and you may not have to purchase mortgage insurance.

675 – 719: This range of scores is considered to be an Average-Good credit rating. You may not be able to get the best rates, but you should have little trouble qualifying for a good loan. You will most likely have an interest rate about half a percent above that of someone with excellent credit.

620 – 674: This range of scores is considered to be below average. Expect to pay about two percent more on your loan than if you had excellent credit. You will likely need to provide more documentation and you will

Under 620: This is considered bad credit and you will most likely need to shop for subprime or bad credit mortgages.

How are credit score calculated?

Payment history – 35% or so is made up of how well you pay your bills on time
How much you owe – 30% of the score is determined by what % of your credit limits you owe on
Length of your credit history – 15% or so of the score is dependent on how long you’ve been using credit.
New Credit – 10% of your score will be based on your new credit. New credit applications and approved credit can lower your score. If you know you are going to be borrowing, try to do all your applications in a short period of time to avoid lowering your credit score.
Other – 10% of the score will be made up of other factors, like variety of credit sources for example. The more different types of credit you have – mortgages, car loans, credit cards, student loans – the better your score will be.

Before you meet with a mortgage broker, document any reasons for late payments, overlimit issues and so forth. The more prepared you are before your meeting with the lender, the better. They may be able to negotiate with the bank on your behalf to get you a better rate.

Now that you have all this information, you may be thinking, “Yes, but tell me how to repair my credit.” When I had credit issues, the first thing I did to repair my credit report was to look for inaccuracies on all 3 reports. If you find mistakes, write to the credit bureau explaining the error. They have only 30 days to reply – if they don’t respond with proof of the problem, they must remove the item from your credit report. Repairing my credit wasn’t easy, part of it was writing to the agencies, but part of it was understanding how the score is calculated and starting to change my spending habits. Over time I was able to repair my credit rating and I am now able to qualify for much better loans. But I started out with credit well below 600 – and my first mortgage was a bad credit mortgage. However, I was able to buy a house and build equity as I was fixing my credit.

In the next article, we will discuss determining how much you can afford.

Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan can you Qualify For?

Here is a list of all the articles in this series:

Do You Need a Bad Credit Mortgage?

Owen — Sun, 30 Aug 2009 04:44:24 +0000

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