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 a fixed-rate amortized loan, much higher than the rates you will find advertised online at websites such as bankrate.com. 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.