With interest rates at record low levels, it's a prime time to enter the housing market. People with good credit will benefit immensely with the lower rates, saving themselves thousands of dollars. But what if you have bad credit? Is it possible to obtain a bad credit home mortgage loan to realize your dream as a homeowner? It's not impossible but your quest will be more challenging and costly than your peers with ideal credit.
As part of the loan approval process, banks and other financial institutions will typically look at your credit report to determine how much risk you bring to the transaction. Banks make a living out of lending money but they also want to minimize their bad debt as much as possible. Therefore, the worst your credit history, and hence your FICO credit score, the less ideal of a borrower you will be. However, this doesn't mean that you are automatically disqualified from getting a home loan. It simply means that you should expect to pay a much higher interest rate to compensate for the higher risk that you represent in getting a poor credit home loan.
Bad credit mortgage lenders have different criteria and may put more emphasis on certain factors than others. Other factors that are looked at include your debt-to-income ratio and loan-to-value ratio. The debt-to-income ratio indicates the borrower's ability to make regular debt payments so the more money you make and the lower your existing debt obligations, the better. The loan-to-value ratio reveals the home's value compared to the requested loan amount so the higher the house is worth and the lower the amount to be borrowed, the better.
If you have been diligently working on techniques to increase credit rating but your score may not be considered good yet, let the lenders know what you're doing and explain the circumstances that gave rise to some of your earlier credit mistakes. It may or may not help but is worth a shot.
So what would be considered a bad credit score in today's economy? The FICO score ranges from 300 to 850 and you will have three scores, one from each of the credit reporting bureaus (Equifax, TransUnion and Experian.) It will vary among lenders but generally a score below 650 would be regarded as bad credit. Conversely, a score over 760 will qualify you for a lender's best rates. Knowing this, you could make it a goal to consistently work on improving your credit score to get better rates because it could mean savings in the thousands of dollars as a result of lower interest rates.
With the recent financial crisis, it can be a frustrating ordeal to get approval for home loans for people with bad credit. If you are in this situation, it is important that you shop around and apply to both online and offline lenders to increase your chance of success. Do not be disheartened by the first "no" nor quickly accept the first "yes." Even though you expect to pay higher interest rates, you want to shop for the "lowest" high rate because every percentage point counts when it comes to a high price investment like a home. If you're not able to qualify for any home loans with bad credit regardless of what you do, consider getting a cosigner.
Remember that bad credit mortgage loans can be refinanced and you are not tied to your bad credit lender forever. Keep working on repairing your credit, either by yourself or with a credit repair law firm, and refinance your higher interest loan once your situation improves.
Other useful bad credit resources:
- home loans for people with bad credit
- bad credit home improvement loans
- home refinancing with bad credit
- improve credit rating
- credit repair law firm