Posts Tagged Credit Score
Bad Credit Loans | Part Two: Mortgage Loans for People with Bad Credit
Posted by Owen in Bad Credit Mortgages on September 8, 2009
The purchase of a home is often the largest financial transaction any of us will make. Whether you have good credit or bad credit, it makes sense that you should approach this kind of purchase ready to do a lot of research and spend some time understanding all the details to get the best home at the best price and with the best terms.
Overview
To find a mortgage loan for people with bad credit, you may need to be a bit more dedicated in your search. There are a large variety of programs out there – and that is part of the problem. There are varying degrees of bad credit. You want to get the best possible deal you can qualify for – not just any bad credit mortgage. You may even discover that you don’t need a bad credit mortgage. You want to go into the process prepared. That way you can ask the right questions, find the right loan product and hopefully get an interest rate you can live with.
Types of Loans
With the recent crackdown on subprime mortgages, it will take a little more digging to find a good loan product. It will be important to research as much as you can on the types of bad credit mortgages.
- ARM Bad Credit Mortgages – Most of the mortgage loans for people with bad credit are adjustable rate mortgages. These can be helpful to get into a loan at a lower payment in the first few years. However you must be careful to know before you sign your paperwork how much the mortgage can adjust. You don’t want your payment to double after the first few years of your loan. Look for 2/28 and 3/27 loans when researching this type of loan.
- Longer term fixed mortgages – There are some programs that offer a fixed rate loan but at a longer term like 40 or 50 years. These loans have the added security of knowing that your payment will not increase. However, because the term is longer you will end up paying well over an extra $100,000 over the life of the loan on an average mortgage amount.
- Low document mortgages – If you do not have a lengthy credit history or if you have other documentation issues, you may be able to find a “stated income” or “low doc” loan. These will typically have higher interest rates but can get you into a house and help you begin earning equity.
Mortgage Lenders for People with Bad Credit
Once you have a fairly good idea of the kind of loan that you think will fit your needs, it’s time to look for a lender or broker to help you find the best terms. Since your lender or broker will be your advocate, make sure you can find someone you feel comfortable working with and someone who will keep in contact with you throughout the process. Rely on referrals from friends and family or your real estate agent. You can also shop for a loan online if you feel very confident in the kind of loan you need and a good estimate of the kind of interest rates you should be getting for your credit score.
Regardless of how you find your broker, make sure you get a 2nd and 3rd opinion. Always shop around.
Preparing for the Application
Have all your documentation together ahead of time – bank statements, pay stubs, income tax returns and W2’s. Make sure to document any credit history issues so the lender can understand the reason for the late payments or other issues. Be as honest and straightforward as you can. You may also wish to provide a list of any credit references not on your credit report. For example, if you rented an apartment for a long time and always paid on time and that does not appear on the report, have your landlord write a letter of reference that you can include in your application.
Summary
Knowing your credit score and the kind of loan that will fit you the best is half the battle. When you know in advance what kind of product will work best for you, you will be able to comparison shop more easily and not be swayed by a quick pre-approval.
In the next article, we will be discussing car loans for people with bad credit.
Bad Credit Loans | Part Three: Car Loans for People with Bad Credit
For reference, the entire series of articles is listed below.
Bad Credit Loans | Part One: Loans for People with Bad Credit
Bad Credit Loans | Part Two: Mortgage Loans for People with Bad Credit
Bad Credit Loans | Part Three: Car Loans for People with Bad Credit
Bad Credit Loans| Part Four: Personal Loans for People with Bad Credit
Bad Credit Loans| Part Five: Bad Credit Refinance
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Posted by Owen in Bad Credit Mortgages, Credit Repair on September 4, 2009
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.
Here is a list of all the articles in this series:
Ins and Outs of a Bad Credit Mortgage | Part One: What are Bad Credit Mortgages?
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan can you Qualify For?
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders
Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit
photo credit: Casey Serin