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Don’t despair if your credit is less than ideal. If you want to apply for a mortgage to buy a home or to refinance the mortgage you already have, you have options where your credit is concerned. The first thing you need to do is to obtain a copy of your credit report and
peruse it carefully to ensure that there are no errors or inconsistencies. For example make sure that an account that went to collections but has since been paid off is no longer dragging down your credit score.
Having poor credit does not mean that you have a zero chance of qualifying for a mortgage. Mortgages for those with bad credit are referred to as sub-prime mortgage loans and are often geared towards paying off existing debts and improving the person’s credit score. Being approved for this type of loan can help to swing the pendulum back to the positive side in terms of your credit score. It shows that you are making an effort that is paying off. This also makes it easier for you to apply for another loan in the future.
Loans that are specifically geared towards those with bad credit are often set up in such a way that the person can work for a year to two years to improve their credit in order that they will, at the end of that period of time, be in a position to refinance their home. Refinancing can then lead to better financing opportunities down the line.
It would be in your very best financial interests to get a short term two or three year fixed rate loan (also sometimes called a 2/28 or a 3/27) as opposed to looking at a 30 year fixed rate loan. For those unfamiliar with a 2/28, it is a two year fixed rate that will be adjustable for the next 28 years. A 3/27 is a three year fixed rate over 27 years. The ARM on these loans is a great deal less than what it would be on the 30 year loan.
Individuals who have poor credit need to be as realistic as possible when they look around for mortgages. It in unlikely that you will get the lowest interest rates because your credit score is working against you. The more you have working against you than for you, the higher interest rates you will end up with. Bear in mind that many things play a role in this including your down payment, your credit profile, the type of home you are looking to buy, your debt-to-income ratio, etc. People with poor credit generally will find themselves with interest rates that are 1.5 to 2.5 percent higher than those with excellent credit histories.
There are a number of different poor credit mortgage programs that you can look into. Your mortgage professional can also help you to enrol in a credit repair program which can then make refinancing a viable option down the line.
Don’t lose heart about the situation. Put effort into repairing your credit on a daily basis. Pay your bills in a responsible manner and always on time. Consider the long term benefits that refinancing can bring. The more equity you build up in your home the better.
Be aware that if your credit is not so good then you may have to pay more in terms of fees up front. The reason for this is because your file will require more work to be done by the mortgage broker than a person who has good credit. More work will have to be done to close the deal.
DJ Raymond frequently writes about mortgages and personal finance . To learn more about the mortgage process visit Compare Mortgage Rates for tips on How to Compare Mortgage Rates