How to Buy a Home With Bad Credit
A Bad Credit Mortgage Lender Can Get You Back into Home Ownership
Do you need a bad credit mortgage to get you back into home ownership? Are you hoping to refinance your mortgage to pull out cash but your credit has taken a nose dive? You're in luck because there are creative ways to get a mortgage with less than perfect credit. Chances are if your FICO score is under 620, institutional lenders and credit unions will tell you that you can't get a loan because you have bad credit, but poor credit is no reason not to get a mortgage.
The truth is you probably can get a bad credit mortgage; it's just that the guys you're talking to -- the banks and credit unions -- don't offer bad credit mortgages. You could be looking in the wrong place.
What you may not realize is potential home buyers with bad credit get a bad credit mortgage all of the time. But they sometimes pay through the nose for it. If you just completed a short sale, you might want to wait 3 years before applying for a mortgage because you'll get a much better rate if you wait. Fannie Mae guidelines say a short sale seller can qualify in 4 years for a loan as long as the seller maintains good credit after the short sale, but FHA is 3 years.
Even if you've filed bankruptcy, as long as you keep your credit squeaky clean after the discharge, you can probably qualify for an FHA loan in a few years. FHA loans don't necessarily carry credit score minimums, but the lenders who fund the loans do want a minimum FICO score.
Tips for Finding a Bad Credit Mortgage Lender
Make sure you check out the mortgage broker with your state's licensing board and deal only with a reputable company. Do not get a hard-money loan through a loan shark. It's easy to get suckered in, so be careful. Following are some tips for taking out a bad credit mortgage:
- Think of the bad credit mortgage as a temporary solution. Make it short term. This does not mean get a short-term loan but plan on paying the loan no longer than 2 years or so before you build up your credit enough to get a decent refinance at a more affordable payment.
- If your regular mortgage broker cannot help you, ask for a referral. Most lenders who have been in the business for a while also maintain contacts in the subprime market and can refer you to a lender who can make you a mortgage.
- Consider an adjustable-rate mortgage. Your interest rate will be high for , much higher than the rates you will find advertised online at websites such as . You will most likely pay higher discount points, too. By getting an adjustable-rate mortgage, you should be able to keep your mortgage payments low enough to be somewhat manageable.
- Do not agree, if you can help it, to a prepayment penalty. A prepayment penalty means you could pay as much as 6 months of additional interest if you pay off the loan early. Since most of your payment is interest and not principal, that's like paying an extra 6 months of payments. Push back if they ask for it.
More Creative Options to Get a Bad Credit Mortgage
Work with a mortgage broker to shop for the best loan available without having to resort to a bad credit mortgage. The first option is to work on repairing your credit. Fixing poor credit can take anywhere from a few weeks to a year, but many issues can be resolved within a few months. The important thing to remember is you can do it if you want to do it. Below are a few more creative mortgage options if you have poor credit.
- Get a free copy of your credit report. Examine it. If you see a mistake, write to the credit bureaus and ask for a correction.
- Ask your mortgage broker about submitting you for a rapid rescore. Your mortgage broker can help you to repair your credit or refer you to a reputable credit repair company. Then a rapid re-score through your mortgage broker might considerably increase your FICO score in a relatively short period of time. Rapid rescore is a mortgage industry secret tactic.
- Consider a co-signer. For example, FHA guidelines will allow a co-signer on your loan. Maybe your parents or another relative could co-sign for you, and you could avoid a bad credit mortgage.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.