Posts Tagged mortgage loans for people with bad credit
A Guide to Finding a Mortgage for Bad Credit
Posted by Kate in Bad Credit Mortgages on September 22, 2009
Even if you have a bad credit score, you can still qualify for a mortgage for bad credit. Sure, the financial requirements may be different for any of the mortgage loans for people with bad credit but you still have the opportunity to prove yourself once again creditworthy by taking this course of action to improve your past financial history.
Primary Considerations for Approving Mortgage Loans for People with Bad Credit
Mortgage lenders for bad credit are typically referred to as sub-prime lenders. These lenders are non-traditional lenders whose main responsibility is to help you, the sub-prime borrower, obtain a mortgage for bad credit loan. Normally, there are two criteria they use to establish whether you’re a viable candidate for any of the mortgages for bad credit that are available. One criterion used to determine a candidate’s suitability for any of the mortgage loans for people with bad credit is one’s debt-to-income ratio. In other words, your income should exceed your expenses with respect to gaining approval for a bad credit mortgage loan.
The other criterion used is the loan-to-value ratio. The lender uses this calculation to qualify you based on the requested amount of the loan as compared with the property’s value or worth of the collateral you’re trying to purchase.
Other Considerations for Approval
Once the sub-prime lender has determined you meet the above calculations, he looks at your credit score. Before applying for any of the mortgages for people with bad credit, it’s good to obtain a copy of your FICO score for your review. That way, you’ll be better able to work with your lender in order to prove your reliability for repaying this “second chance” higher interest loan. Explain to him, if feasible, reasons for defaults or late payments. Lenders tend to be more understanding if such delinquencies were due, in part, to being laid off or because of a divorce settlement.
Your loan will be considered as well on your net income or income after taxes. Also, if you can apply for the loan offering some kind of down payment, your chances will be improved. Typically, a home should not be purchased that is more than two and one-half times your income per annum. Therefore, trying to apply for a mortgage for more than this amount may prove to be a hardship down the road which is especially important to keep in mind if you’re applying for a bad credit mortgage loan.
Types of Bad Credit Mortgage Loans
The two basic types of mortgage loans for bad credit are a fixed rate type mortgage and the adjustable rate mortgage, normally referred to as an ARM.
The fixed rate mortgage is a long-term secured loan whose interest rate, as the name implies, remains fixed through the life of the loan. On the other hand, an ARM is a secured loan whose interest rate can vary depending on the current market conditions.
Sometimes an ARM is a good mortgage for bad credit loan as the interest for the first year of the loan is substantially lower than other rates prevailing at the time. Thereafter, the rate is typically adjusted and the payment is determined on the amount of interest based on the market index to which it’s tied.
Final Suggestions
Whatever type of bad credit mortgage loan you choose, make sure you secure the lowest “high interest” rate you can. Be assured if you prove your ability to meet your payments on a regular basis that you have the opportunity to refinance at a lower interest rate at a later time.
When you secure your loan, get into the habit of paying bills on time and carrying credit card balances that are approximately within 25% of the limits on the cards. That way you can start on a progressive track to a better credit score and a happier financial future.
photo credit: Ryan Stanton
Bad Credit Loans | Part Two: Mortgage Loans for People with Bad Credit
Posted by Kate 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
Bad Credit Loans | Part One: Loans for People with Bad Credit
Posted by Kate in Bad Credit Auto Loans, Bad Credit Mortgages, Bad Credit Personal Loans, Bad Credit Refinance, Credit Repair on September 8, 2009
In this series of articles, I will be giving an overview of different types of loans for people with bad credit. Many of these loans have features in common. Feel free to jump to the article that applies most to the subject you’re interested in. Each article has a table of contents at the end, as well as a link to the next article in the series.
Overview
Most of us have had financial hardships at least once in our lives. It doesn’t take much to upset the normal flow of finances – a loss of a job, unexpected medical expenses, auto accident – in my case, it was the unexpected closure of my small business. Regardless of the cause, bad credit is one of those things that many of us have to deal with. Just because you’ve got bad credit doesn’t mean that you don’t have the same financial needs everyone else does when it comes to borrowing. It just means that in order to get a good rate, you have to work a little harder and a little smarter. You may also have to look at bad credit loans as more of an opportunity to meet your financial needs while rebuilding your credit.
What is your situation?
Before you start your search, know what kind of loan you need. Are you looking for personal loans for people with bad credit, or a bad credit refinance? Knowing the type of loan you need will speed up the process of finding the right financial solution for you.
Know your Score
Regardless of the type of loan you need, the first thing you should do is know your credit score. Order your credit reports from all three reporting agencies – Equifax, TransUnion and Experian. You can usually find a way to get these reports for free, especially if you have been turned down for credit in the last 30-90 days. Once you’ve got your credit report, look at it for errors and be sure to write to each credit agency to report the errors right away. Know the meaning of credit scores and use that knowledge to improve your credit. Your credit score will be a factor with almost any loan you apply for, but will be most critical for home loans for people with bad credit.
Have a Plan
When you start shopping for a bad credit loan, have a rough idea of what you’re looking for. If you need student loans for people with bad credit for example, know when you expect to be able to start making payments. You probably don’t want to sign up for a loan that requires you to begin making payments when you’re still attending classes. If you are looking for car loans for people with bad credit, have in mind the price range of the car you’re thinking about buying. With all loans know the upper limit of what you can afford in monthly payments.
Shop Around
Most financial needs are immediate. You have pressing bills or expenses that need to be paid now. It is very tempting to take the first loan that you qualify for. It can make a huge difference though to shop around – especially for mortgage loans for people with bad credit. Small differences in interest rates or closing costs can cost you thousands of dollars over the life of a loan. Auto loans for people with bad credit can be costly as well – know in advance the total cost of financing your new car and the total monthly payments. Don’t forget to factor in insurance on a new vehicle – newer cars generally cost more to insure and can come as a surprise later on.
Summary
Bad credit doesn’t have to be the end to borrowing. You just have to know your situation and be prepared to look for the right product to suit your needs. Once you find the right loan for people with bad credit, think about how you can restructure your finances to improve your credit to eventually get better rates.
In the next article, we will be going into more detail on a particular type of bad credit loan – mortgage loans for people with bad credit.
Bad Credit Loans | Part Two: Mortgage 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 Six: Getting the Most out of Mortgages for Bad Credit
Posted by Kate in Bad Credit Mortgages on September 4, 2009
In order to get the most out of your mortgage for bad credit, be sure to follow the guidelines in the earlier 5 articles. In summary:
- Know your credit score – the more prepared you can be going in, the better you will be able to negotiate and find the right loan.
- Before you start shopping for a house, know how much you can afford. That way you won’t fall in love with a property that is more expensive than your pocketbook will allow.
- Investigate the types of mortgage loans for bad credit that are out there – and determine the right type of loan. If you can do this before you talk to your mortgage broker it may be easier to keep from getting swayed by another loan product.
- Find a good mortgage lenders for bad credit by talking with friends and family, and also check with your real estate agent. Build up a good rapport with the broker – they will become your advocate.
Once you have your mortgage – there are some things you can do to get the most out of it.
Start working on repairing your credit. Refer to article two about credit scores where we discuss what kinds of things impact your credit and how. Make sure to correct any credit report errors, start paying down existing credit cards or lines of credit.- Make sure to always pay your bills on time. Many people find it helpful to set up automatic bill payments for the minimum amount so that payments are made without having to think about it.
- Put in some elbow grease and improve the value of your home. It will be easier to get refinanced with better terms if you have built up equity in your home. Keep on top of routine maintenance, make some cosmetic improvements and keep records of everything you do to improve the property.
Mortgage loans for people with bad credit have received a lot of negative attention in the media recently. Don’t let anyone make you feel bad about your situation. We all have gone through rough financial times.
Remember, there is nothing wrong with mortgages for people with bad credit – they are stepping stones to get you into a home of your own, help you start building equity, and give you an opportunity to rebuild your credit and eventually qualify for a mortgage with better terms.
I hope you’ve found this series on bad credit mortgages to be helpful – if you have, I would love to hear from you.
Here is the 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 One: 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
Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan Can You Qualify For?
Posted by Kate in Bad Credit Mortgages on September 4, 2009
Most bad credit mortgage loans require a debt-to-income ratio of no more than 36 percent. What this means is that you can’t spend more than 36 percent of your monthly income on your mortgage payment. These ratios will vary. Some will require a ratio of 28 percent and most require a debt-to-income ratio of 33 percent.
To determine how much you can qualify for, you will need to know the following things:
- Gross monthly income
- Monthly debt – how much do you owe on credit cards, car payments, student loans, other debt
Take your gross monthly income and multiply it by .36. For example, if my monthly income is $5000, I’d multiply that by .36 to get $1800. Next, subtract your monthly debt payments. So if your total monthly debt is $600, subtract that to get a total of $1200. This is roughly how much of a monthly payment you can afford. Other factors will need to be included as well such as the property taxes, any homeowners dues and other fees related to the property.
To determine the total cost of the house you can afford, at 6%, it is roughly $6 per thousand. So a $200,000 would be $1200/mo. This does not include any closing costs or points rolled into the total amount of the loan.
Mortgage loans for people with bad credit may have looser requirements for income. You may be required to provide proof of income, or you may be able to do what is called “stated income”. It all depends on the kind of bad credit mortgage loan program you can qualify for. Some mortgage loans with bad credit require a larger downpayment in exchange for lower debt to income ratio. Others have relaxed standards on downpayments in exchange for strict proof of income reporting.
In general however, mortgage loans for bad credit still have the same 28 to 36% debt-to-income ratio requirements that other traditional lenders have. When applying for a loan, don’t make any changes that can impact the level of your income.
In the next article, we’ll discuss specific types of mortgages for people with bad credit.
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
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: Photos8.com