If you have bad credit, you may think that getting a mortgage is impossible. But there are mortgage companies that specialize in helping people with bad credit get mortgages. They want you as a customer.
Let's face it, if you're ready to settle down, there are all kinds of good reasons to buy a home instead of paying rent to a landlord.I'm not just talking about the freedom to do what you want with the place, though that's pretty big. You can hang pictures, paint the walls, build a fence, put up a swing-set, and nobody can complain. Even little stuff, like tape your computer wires to the wall and the landlord won't yell that you're ruining the paint, like some of them do, even though it's just masking tape. Sheesh.
Paying a mortgage on time helps repair a bad credit score back to normal, and it builds up equity in your house too, so eventually you've got an asset you can borrow against again in an emergency.
Housing prices are low. Like they're ever really low, but you know what I mean. So you've got a better chance now of your house increasing in value over time, the way it did for our parents or grandparents, instead of dropping in value and being worth less than the mortgage, like happened recently. Those people got burned, but that bubble has burst.
I've got a friend who's studying to be a real estate agent, and wow, you ought to see how cheap some houses are now, compared to a few years ago. Same house, selling for a hundred thousand less. Little cheap bungalows in the country that would be perfect for somebody who's tired of paying rent, selling for ten or fifteen thousand less, when they were only selling for forty or fifty thousand in the first place.
So, How Do You Get a Bad-Credit Mortgage?
Honestly, there are mortgage companies clamoring for your business. Maybe not the banks around town, because they cater to prime (high credit) borrowers, but there are companies that specialize in offering mortgages to bad credit (sub-prime) home-buyers. Search the internet for bad credit mortgages and you'll see companies begging to offer estimates and quotes. You can also ask local banks if they have a bad credit or sub-prime mortgage department.
So the hard part isn't finding a mortgage when you have bad credit, it's finding the best, cheapest mortgage for you, while avoiding scams, ripoffs and way-too-high prices.
Getting Ready for a Mortgage
First, clean up your credit score as much as you can. If there's anything you can pay off, do it. Talk to lenders and see if you can settle and get them to report it paid in full. Don't apply for a new credit card or get a new loan for a car or anything, for a few months before you plan to look for a mortgage. The better your credit, the lower your interest rate.
Save up as much as possible for a down payment. Bad-credit mortgage lenders will give you a lower interest rate if you have a bigger down payment, because their risk is less. So a bigger down payment will lower your monthly payments two ways: cheaper interest, and less to pay back. Twenty percent is good, thirty percent would be dandy.
Things to Ask
What's the penalty? Smart people go into a bad-credit mortgage with the idea that it's only temporary, and as soon as their credit improves, they plan to refinance to a mortgage with cheaper interest and better terms. Bad-credit mortgage companies have figured that out, so they'll usually have pre-payment penalities to keep you from refinancing too soon. See, they really do want your business. Check out what the penalty is and when it disappears, and make sure that fits with your plan.
When's the rate going to change? If you get an ARM (Adjustable Rate Mortgage), you'll have a cheap rate for a few years, and then it'll start changing, probably up. If the rate goes up, so do your payments. Plan for that. Ask how many years the introductory rate is for, and what happens after that.
What's all this extra stuff? Mortgages are complicated enough, that lenders think they can sneak in a few more things you won't notice. Don't sign anything with blank spaces in it. Ask about any "required" credit insurance or life insurance or any fees you don't understand, and find out how required they really are.
Why do you want me to lie? Don't do it. If a company expects you to lie about your income or about the appraised value of the house, it means they're willing to lie to you too. You don't want to find out the hard way which things they've told you are lies. Walk away.
What happens when the balloon pops? Some bad-credit mortgage lenders offer "balloon mortgages," where you make payments for a few years and then the whole balance comes due. That's fine if you're planning to refinance then anyway, when you expect your credit to be better. But it's something you really have to plan for. Worst case, what if you can't get another loan then? Figure that out.
The Bottom Line
When looking for a bad credit mortgage, read up on mortgages and shop around. Compare quotes and terms with several lenders. Talk to local banks too, just in case they have a bad credit mortgage department. Pay a few bucks to somebody smart and impartial, like a real estate professional, to double-check any paperwork you don't understand.
Remember, bad credit mortgage companies aren't doing you a favor. They're in business for this. You're the customer they'll make money from. They need you more than you need them, because you can always rent, but they'll go out of business if they don't grant enough mortgages. So yes, you may have to pay more than somebody with good credit, but hold your head up and go into this with your eyes open, and be a smart customer.
8:57 p.m. January 29
Couple of other things. Find out whether taxes and homeowner's insurance are included in the mortgage or whether you have to pay them separately. If they're separate, no problem, just need to budget for them too.
8:50 a.m. January 30
These kinds of subprime mortgages are what caused the financial crisis of 2008. They're predatory lending, that traps ppl into high payments and high interset rates which they then default on.
10:12 a.m. January 30
If a consumer can't afford a home, they shouldn't buy one. Period. No one in America is "owed" a home, and it may be beyond the capabilities of a lot of people to pay a mortgage. There's no point in going into debt at a ridiculously high interest rate just to buy a home.
10:43 p.m. January 30
Nobody can get trapped into something if they're aware of what's going on. Read before you sign. If you don't understand it, show it to someone you trust, who does. That's what it comes down to. You want to know my thoughts on the subprime mortgage melt-down? Companies got greedy and loaned to people who couldn't afford loans. Companies thought they could get rich by tricking people into rates and terms they didn't understand, but look who got bit. The companies, when those people defaulted. So much for getting rich with trickery. They should have known better. But companies still try it, so be skeptical, know what to look for like the things above, understand what you're signing, and you'll be fine.
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