Having bad credit makes many aspects of your life more difficult. It has a huge impact on your ability to get a loan for just about anything from a vehicle to a credit card. In addition, you might have a hard time getting a contract for cell phone service, utilities or even signing a lease on a place to live.
But by far the most challenging loan to get is a mortgage if you have a bad credit score. There are many different aspects of a home mortgage that will vary if you have bad credit. Knowing this information can help you to know if the terms of your potential mortgage are unusual and if you will be paying much more for your home than if you had good credit.
But even if you have bad credit, there are still options for you to explore to get a home loan and to begin rebuilding a strong credit score. Finding private mortgage lenders for bad credit is a step that you will want to consider if the terms for a conventional loan are not acceptable to you.
Your Interest Rate is Important
The most obvious part of your mortgage that will be affected by bad credit is your interest rate. A person with a credit score of 601 – 660 (fair) or 501 – 66 (poor), would be quoted a rate for what is called a subprime mortgage. The rate is higher than a prime rate and is based on the credit score of the person who is applying for the mortgage. The lower your score is, then the higher your interest rate will be. Be sure to carefully consider the interest rate that you are being offered. Don’t be too excited just because you have found a way to get financed and sign the first mortgage opportunity that you get. The fact is that having just a 1.6% higher interest rate over the course of a 30 year mortgage, could cost you an additional $100,000. Be sure to look at the total amount you will be repaying, principal and interest, when you are deciding if a mortgage interest rate meets your needs.
What You Need to Get Started
Another mortgage term that might be a drawback is the amount of the down payment that the lender is requiring. Some down payments can be as low as 3%, but they require the borrower to have private mortgage insurance (PMI). This insurance is priced based on the risk involved in the loan, so if you have good credit then your premium will be lower.
Once you have 20% equity in your home then you can cancel the PMI. But if you have a subprime mortgage, the lender can require as large as a 15% to 20% down payment. If you are purchasing a $300,000 home, that means you would need to have $45,000 to $50,000 saved for your down payment which could be very difficult.
More Insurance Costs
In addition to PMI, you will need to purchase homeowners insurance. The premium for your insurance is normally included in your monthly mortgage payment. If you have a low credit score, it is very likely that your insurance premium will be higher than someone who has a better credit score. 85% of homeowner’s insurance companies stated that they factor credit scores into figuring policy premiums in states that don’t specifically forbid the practice. It is a good idea to know if your state allows such a pricing plan and if it does then expect to pay more than what the average homeowner is paying for their insurance.
Balloon Payment Penalty
A balloon payment mortgage is a mortgage where the monthly payments don’t add up to the full repayment amount of the loan. The reason that this type of mortgage is appealing is because the monthly payments are lower than they would be with a conventional loan. The down side, and it is a huge downside, is that there is a final payment that is due upon completing the term of the monthly payments. And as the name implies, the payment is large. Most buyers who agree to a balloon payment mortgage are doing so because they intend to work
A balloon payment mortgage is a mortgage where the monthly payments don’t add up to the full repayment amount of the loan. The reason that this type of mortgage is appealing is because the monthly payments are lower than they would be with a conventional loan. The down side, and it is a huge downside, is that there is a final payment that is due upon completing the term of the monthly payments. And as the name implies, the payment is large. Most buyers who agree to a balloon payment mortgage are doing so because they intend to work at improving their credit score and then refinancing prior to the balloon payment coming due.
Prepayment Penalty
Unlike a balloon payment penalty which negatively impacts the borrower if they don’t refinance their mortgage, the prepayment penalty is designed to ensure that a borrower will not refinance their mortgage. If they do refinance or pay off the mortgage early from some other source such as selling the house or some type of windfall, the borrower much also pay a penalty on top of the mortgage repayment. A common penalty amount is the total of 6 months of interest.
Refi Might Not Be an Option for You
Many consumers are willing to agree to higher payments on interest and insurance for a few years in order to get a mortgage financed with a bad credit score. They plan on working to improve their credit and then applying for a refinance. But sometimes their score is so low that even after a few years of on time payments and reducing their debt, their credit score is still too low to allow them to refinance on a conventional loan.
Another Solution for a Mortgage with Bad Credit
If you have a credit score of less than 620, have had delinquencies on a mortgage in the past 12 months, or have had a bankruptcy in the last 24 months, then you will want to search for private mortgage lenders for bad credit. In this instance, you are not borrowing from a bank, you are getting the money from a person or a business. And unlike the lengthy process of documents and credit checks that banks require, many private lenders are much more lenient and require less documentation.
There will still be a document drafted which will include all of the terms of the loan including the payment due date, the amount and the interest rate. The lender might also require other terms to protect their investment, but those are terms that you can discuss and work out much easier than you would with a bank.
If you have a credit score of less than 620, have had delinquencies on a mortgage in the past 12 months, or have had a bankruptcy in the last 24 months, then you will want to search for private mortgage lenders for bad credit. In this instance, you are not borrowing from a bank, you are getting the money from a person or a business. And unlike the lengthy process of documents and credit checks that banks require, many private lenders are much more lenient and require less documentation.
There will still be a document drafted which will include all of the terms of the loan including the payment due date, the amount and the interest rate. The lender might also require other terms to protect their investment, but those are terms that you can discuss and work out much easier than you would with a bank. You could choose to get a no inspection title loan or maybe a title loan with no job.
The Bottom Line-Dreams Can Come True!
Even with bad credit, there are ways for you to get a mortgage and to own a home. Private mortgage lenders who specialize in bad credit is just one option to avoid all of the higher costs associated with a conventional loan for a person with bad credit. If you are willing to explore your options, then you can own the home of your dreams.
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