15 Mortgage Tips For People With Bad Credit
If you’ve had some credit difficulties, you’re certainly not alone. And if you’re under the impression that you’ll never be able to buy a home, think again. There are avenues to accomplish virtually anything that you want to do. Below are some helpful tips to aid you in finding and qualifying for a mortgage, even with problem credit. (The first eight are not limited to just home loans; they can be useful in helping you to obtain credit for any purpose.)
1. Develop a reasonable budget, and stick to it. Your credit woes may have stemmed from some unfortunate circumstance such as an illness or loss of employment, or they could be due to poor financial management and discipline. Either way, it’s up to you to get your finances under control; only then will you be able to turn your credit situation around. If necessary, seek the help of a professional counselor.
2. Check your credit file for discrepancies or inaccuracies. Regardless of the condition of your credit, you want to present the best possible financial picture of yourself as possible. This means knowing what’s in your file ahead of time and fixing any minor irregularities that may be found. Credit reporting errors are a common occurrence. Correcting some of them, such as a bad account that doesn’t belong to you, can improve your score and possibly lower the cost of your loan.
3. Pay your bills on time. This is one of the most basic and effective means of raising your credit score and possibly qualifying for a lower-interest loan.
4. Repay loans in installments. Developing a substantial credit history in this manner is more valuable to your credit score than paying your balances in one lump sum or several large payments.
5. Catch up on any late or missed payments as quickly as you can. The credit formulas that determine your score factor in not only missed payments, but the length of time that any bills remain unpaid; such as 30, 60, 90, or more than 120 days, for example.
6. Don’t attempt to open any new credit accounts from three- to six months prior to applying for a mortgage. Lenders can view such new credit — or even attempts at new credit — as potential red flags. They also add to your overall debt, lowering you credit score and making it more difficult to qualify for a home loan.
7. When looking at you credit file, lenders like to see from three to five active trade lines in good standing. If you have to open a new account or two to get to this number, try local merchant accounts (they’re generally easier to qualify for). After you’ve opened them, however, follow the advice of Number 6 above and wait about six months before applying for a mortgage, if at all possible. This will give the new accounts time to become “seasoned”, as well as establish a positive history from which your credit score will profit.
8. Don’t close any old accounts that are still being reporting in your credit file. Doing so won’t help and can only hurt your score, because your credit history will be made to seem younger than it is.
9. Know that the cost of your mortgage will be higher for one — or both — of two reasons. First, lenders price their loans according to risk, and as a borrower’s credit score and financial strength decrease loan rates and fees increase (the first eight tips will help you combat this). Second, lenders prey upon your lack of knowledge of the mortgage process or your available options. This is where doing your own homework can benefit you greatly.
10. Assess your potential lender’s character. As the lender is forming a judgment of your character, you should be doing the same. A reputable bad-credit lender should be focused on your realistic ability to repay the loan; if he or she seems to be more concerned about getting you to borrow more money, inflating or falsifying information on your application, or using high-pressure tactics to get you to sign a contract, you can be certain that you’ll find a better deal and more peace of mind by doing business with someone else.
11. Secondary market players Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) are now buying subprime mortgages. This is good news for bad-credit borrowers who may just miss the cutoff for better loan rates. FNMA and FHLMC lenders’ rates will probably be better than those of traditional subprime mortgage lenders.
12. Watch your back-end. No, not the part that fills your jeans. Your back-end ratio is equal to your total monthly payments (including all bills and proposed housing expenses) divided by your gross monthly income. Typically, lenders prefer to see this ratio at no more than 36%. Some will go higher, if your credit is good.
13. The more reserves you have, the better. Reserves are liquid assets that lenders want you to have available. Some lenders may require that you have an amount equal to three months’ mortgage payments on deposit. The more you have to draw on if necessary, the better position you’ll be in to possibly negotiate more favorable terms.
14. Give the lender letters of explanation about areas of concern in your application or credit file. If there were extenuating circumstances that you could show the lender are now past, it could be just the thing to help the underwriter to decide in your favor.
15. Lastly, you must realize that just because you have bad credit, you do still have options. Explore them. Most lenders today offer bad-credit loan programs. Don’t be compelled to accept the first package that’s presented to you without shopping around. It’s up to you to find the mortgage which best fits your circumstances and needs.
