No matter why you take out a mortgage loan, bad credit will weigh you down. You mortgage loan applications may be denied, or approved with a high interest rate and high fees.
For many, a home purchase and a mortgage loan are the biggest financial transactions. Prepare yourself and avoid taking a mortgage loan with bad credit. If you don’t have a choice learn about your alternatives to deal with bad credit mortgage loans.
Make the right decisions about mortgage loans and bad credit by learning about:
Mortgage loans is a generic term applying to different types of loans and credit that is secured by using a house or property as collateral. (Most mortgage loans include a personal guarantee in addition to the property).
Some of the common names are purchase mortgage loan, refinance mortgage loan, HEL (Home Equity Loan), HELOC (Home Equity Line of Credit), or second mortgage.
You make take a mortgage loan for any of the following reasons:
No matter the reason, bad credit increases the difficulty to obtain a mortgage loan. Lenders look for the property as underlying security, but rely on you to repay the loan.
The lender wants to know that you have the means to pay back the loan and the willingness to follow through with the payments. Mortgage lenders follow underwriting criteria to determine if you qualify for a mortgage loan. These guidelines vary by mortgage product, lender, geographical area, and other factors. In almost all cases, bad credit is a barrier to a mortgage loan.
Credit is measured in different ways, but a lender will look at these three main criteria:
DTI (Debt-to-income) ratio: Mortgage lenders know, by experience, that you can only afford to use so much of your monthly income to pay off your housing expenses, as well as you total debt. The front-end DTI measures your total housing expenses, either your rent or your mortgage payment and other insurance and tax payments relating to your house, as a percentage of your monthly income. Your back-end DTI (often referred to just as the DTI ratio) measures your total housing expenses plus your other monthly debt payments (including your minimum credit card, auto loan or leasing, medical debt, student loan) as a percentage of your monthly income.
Although the required DTI ratios vary, a general rule-of-thumb for conventional loans is that your back-end or total DTI ratio should not exceed 45%. A high DTI ratio is considered bad credit. Sometimes, compensating factors, such as a large unencumbered asset, can help you overcome this problem. Use Bills.com DTI calculator to help you determine your ratios. But remember, calculating your exact income and expenses is complicated, so be prepared to work closely with your lender.
Credit Score: Your credit score is the most common method of classifying you as having excellent, good, fair, or bad credit. The most common credit score used is the FICO score, which runs between 350 and 800. Your credit score is based on your past credit history. Derogatory or negative items remain on your report for at least 7 years. Your credit score is determined by:
As you can see, bad credit comes in different forms. Learn ways to deal with your bad credit.
Since the housing and economic crisis of 2008, the subprime market, which catered to bad credit mortgage loans, collapsed. In fact, taking a loan with bad credit is not only harmful to the lender. Borrowers, who take on too much debt, put themselves in a precarious position. Eventually the debt burden becomes too heavy and you find yourself juggling too many bills.
Here are steps to take when you have bad credit and want a mortgage loan:
Prepare yourself: Make a personal budget. Keep track of your monthly expenses by category. It takes time and patience, but good financial planning helps you control your expenses. Use the Bills.com personal budget guide to get you started. To maintain or build good credit make your payments on time. Use the Bills.com mortgage affordability calculator to help determine what amount of mortgage loan you can afford.
Repair: Monitor your credit report. Dispute any negative item that does not belong to you. If you have collection items that negotiate a pay for delete settlement, or at least a settlement to have them marked as paid off. If you are considering professional help, then read the Bills.com review of Lexington Law Review.
Limited Products: There are some mortgage loans for bad credit, although significantly less than before. Here are some examples:
If you don’t have a mortgage and you have bad credit then:
If you have a mortgage and bad credit but can afford to make your payments, then look into: