For whatever reason, you now have bad credit. This could be caused by the economy downfall, which may have eliminated your job. Thousands of people are finding that there field of expertise is gone and are having to be retrained to take on a new career. There are also those of us that may still have our jobs but due to the unemployment rates are finding that we are expendable and replaceable. Knowing this makes us vulnerable for pay cuts. Where we may have been doing very well a year ago, we are having to work twice as long and twice as hard for half the money. But even so we are feeling lucky that we have some type of job.
If you have made it through the strain and are starting to see daylight, you may wonder if your dreams of owning your own home are out of the question. If you have had late payments and now have a bad credit score, you are going to have to work to get a home mortgage loan. There are steps that you can take to help get you closer to your goals and some obstacles you will have to endure. But the bottom line is you can still get a mortgage loan with bad credit.
What is it going to cost you to have a mortgage with bad credit.
Although you may find it impossible to get a mortgage loan, there are "alternative" lending companies that will be able to help, but there is a cost.
Higher down payment
Now more and more lenders are requiring a down payment. The days of zero down home loans are almost gone. For those who have bad credit, your down payment is going to be much higher. This down payment could be from twenty percent to fifty percent of the amount needed to purchase the home. This can be nearly impossible for many of us. However the banks have taken a hard hit with for closures and are going to want to safeguard there investment. If you are unable to wait until your credit is in better shape you are going to have to have a chunk of money to get that loan.
Due to your bad credit you will find that the interest on the mortgage loan may be high. You are now considered a risk and because of that you will have to pay this high interest rate. The higher interest will make your monthly payments higher and the total amount you will repay higher. If you may have been able to afford a $100,00 house you may find that with the higher interest you may only be able to afford $65,000.
Loan amount: 100,000 with a 20% down payment
good credit interest: 5.5%
payment (interest and principal only) $454.23
bad credit interest 10%
payment (interest and principal only) $702.06
How to get back on track and get a reasonable mortgage loan.
Pay down your debt
Many banks were loaning to people that clearly were over extended. With the new rules in place you are going to need a lower debt ratio. Paying your credit cards and loans down will decrease the interest your have to pay and increase your chances of getting a reasonable loan. This will may take some time but that time will also help you show your improved payment skills and help you save for a down payment which will also get your a better loan.
Rebuild your credit
The best way of getting a mortgage loan with bad credit is to get rid of the bad credit. This can be done buy rebuilding your credit and increase your credit score. Your credit score is going to play a big role in getting the funds you need. If you are still struggling, then this is not the right time to buy a home. Be sure that you are in a position to show that you are capable of paying your bills and honoring your loan agreement. Nobody will loan you money if you can't pay the bills you already have. But if you have succeeded in getting through your trouble times and are now back on track you can get that score up and work toward getting a loan.
There are two ways to repair your credit score. First you will need to have a good debt ratio. This means that you will need to pay down your current debt so that your debt ratio is low. If you make $4000 per month and you have a thousand dollars in debt you will be at 25%. This is not to say that you won't get a home mortgage loan but it will decrease your chances. One-third of your FICO score comes from your available credit. They will compare your credit limits to what you owe. The bigger the gap the better. However you will want to have credit in use. This means that if you have all your credit cards and loans paid off, it can actually decrease your score. It is best to have credit being used. If you don't' want to use credit and pay interest on your purchase, you can set up automatic payments. This can be done with a utility bill. Say you set up your electric payment to be paid by one credit card each month and then that credit card is paid off automatically by your checking or savings account. This will help keep your credit active, show a good payment schedule and in turn increase your credit score.
You also need to establish that you can pay your bills on time. This is going to take some time depending on how bad your credit currently is. If you only got behind for just a short period, perhaps a week or two, then it wont' take as long as if you just missed several payments. If you are able to get your debt down to a good ratio, you will still need to show that you are in control of you finances.
Bankruptcy. If you have eliminated your debt by filing for bankruptcy there is going to be a waiting period before you will be able to get a mortgage loan. You will still need to work on improving your credit just as you would if you had fallen behind. Getting a secured or unsecured line of credit can help increase your score. Having a credit card only helps if it is actively being used. This shows the lender that you are capable of managing your finances and paying your bills. If you are still leery of using credit try setting up a utility bill to be automatically paid each month by your credit card and then set up your checking account to automatically pay your credit card bill off each month. This will keep an active line of credit and show that you are capable of maintaining your payments.
After filing bankruptcy you will generally have to wait for two years to be considered for a mortgage loan. During this time is when you need to be establishing a good credit history. By being patient and waiting out the two year period you will find that you can generally get a mortgage loan at a competitive interest rate with a lower down payment. However if you find that you are ready to buy a home after six months, you can still get a mortgage but there will be cost. You defiantly will have a higher down payment and interest. This interest can cost you thousands of dollars over the term of your loan. If waiting is not an option you could refinance after you have improved your credit and secure yourself a reasonable interest rate.
Getting a bad credit mortgage loan can be done but having patience and waiting can payoff in the long run.
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