If you are looking for a mortgage and you have bad credit, it is still possible to get one. There are plenty of mortgage brokers and lenders out there who are willing to lend you some money for a mortgage. But before you start shopping, you need to know exactly what you are getting into and how things will eventually turn out. Well, we are not trying to scare you away but getting a skeptical mind in the right place is essential if you don’t want to be at fault.
Firstly, you need to understand that borrowers with good credit scores will always have an added advantage to those with credit scores lower than a certain limit. While it may sound unfair, the lenders have their own reasons and they amend the rules for people with bad credit. But, if you can understand the essential factors that go into the decision making, you can have a position of leverage to find the best mortgage.
The guide is a simplified version that blends the market research with our expertise in the field to provide you with all the necessary details about bad credits, mortgages, and a step-by-step tutorial on the types of mortgages and advantages if using a mortgage broker over a bank.
Lender’s perspective of bad credit
While you are consumed with all the thoughts of bad credit, we have brought to you the lender’s version of the term and how do they see it. We are trying to induct you with this knowledge because, in the transaction field, it is the lender that decides whether to pursue or not and you understanding their part will help you leverage your position.
Now, bad credit does not simply depend on the credit scores and owe different meanings in the market. However, the experts believe that credit score below 640 is considered as bad credit. But, this is not the case as many can have a credit score of 600 because they were hit by bankruptcy, foreclosure, or short sale a few years ago. In this case, the lender will see your approach to minimize the debt and will generate reports based on your debt paying condition keeping the tab with the worst-case scenario.
However, if you belong to the category of the late payer in the past 12 months, there is a high chance that your application will be right away rejected. So, it is advisable to change your financial habits to secure an improved credit score.
Types of mortgages one can get with bad credit
In the usual environment, a person with bad credit can call on the two options: FHA loans and VA loans.
The Federal Housing Administration (FHA) loans are considered an ideal loan for someone with bad credit. The reason being that the consumers with a credit score as low as 550 can avail the loans but at a cost of down payment. Unlike other banks that require at least 640 credit score to forward the application, FHA loans are available for people with credit scores 580 and 550.
Now, as we already mentioned that the lenders dealing with accounts with bad credit have a tendency to amend the rules to mitigate the risks associated with loans. So, you will have to make a down payment of 3.5% and 10% for 580 and 550 credit scores, respectively.
VA loans, on the other hand, are present to back the back credit consumers in a thoroughfare. The veteran affairs loans have no minimum credit score requirements that make the lender the key decision maker. The profile of the borrower is a key driver that includes the whole gamut of financial sources and applications. It is a great option if you have done some grave mistake in the past but have utilized the past few years to build a strong credit profile.
The major disadvantage that comes along with the VA loans is that it is reserved for retired and active duty members of the military and in some cases spouses of deceased veterans.
The deal maker
Having a bad credit score should not discourage you in the first place because the lenders do not reject any application based on the credit score only. There is a whole process of evaluating the application with financial breakdowns and debt paying capability along with rain check. Now, if you qualify for any of the types of loans, you will need to look out for multiple lenders and check with their interest rates and down payment requirement. So, if you have bad credit, we would suggest that you should raise your score before applying for a mortgage and ensure that you will be able to pay off the bills. This is the major deal maker for you and enhances the lender-borrower bond.
Deil D Pecci is a writer and blogger based in Chicago who covers topics on personal finance and entrepreneurship. Deil D Pecci has made Chicago her home along with his wife and children.