It is a commonly held belief that a poor credit score makes it almost impossible for a person to qualify for a home loan. However there are lenders willing to make home loans to people with bad credit if they are in a financial position to meet their requirements.
The added price tag that comes with a low credit score when applying for a home loan is high interest rates, high down payments and high fees/points. Poor credit mortgages can carry interest rates in the 10 percent to 15 percent range with a down payment of anywhere from 20 percent to 50 percent of the purchase price and upfront originating fees of as much as 10 points (1 point =1% of the loan).
Bad credit mortgages also typically carry high fee structures. While a first time home buyer with excellent credit might find them self looking at a one point originating fee a person with poor to bad credit could be looking a five to ten points either paid upfront or added to the principle.
It is obvious that it is far more desirable to have a high credit score when looking for a mortgage however most people just decide that they want a home, call a Realtor and jump right into the deep end without any thought into the process of credit repair.
If you want to buy a home but your credit score is in the lower ranges the first thing you need to do before you consider getting in touch with a real estate professional to arrange viewings is to get your credit report and go through is thoroughly to try and find ways of raising your score.
Simply paying off or paying down credit card balances can have a large positive affect on your credit score. High credit card balances in ratio to the credit card limit are seen as risk to the lenders and result in lowering your credit worthiness which in turn lowers your credit score. Try to keep your carry over balance at no more than 30% of your limit. If you have more than one card try to spread the balances over all the cards.
Check through your credit file for outstanding payments or judgments are dragging your credit score down. Many people feel that they have moved on from the old cell phone bill or utility bill that the neglected to pay for what ever reason and have now totally forgotten. The trouble is that your credit file holds its memories for 7 years and bankruptcy memories for 10 years.
If you find on old unpaid bill like a utility bill for an apartment that you moved out of years ago and forgot to pay then call the creditor and arrange to pay it off in return for having it removed from your credit report.
A word of caution however, most delinquent bills are sold off by the original creditor at a discount to collection agencies. The business model of collection agencies is to get paid period. Remember that the collection agency did not report you as delinquent to the credit bureau, so if you are negotiating to have the negative entry removed in return for satisfying the debt, ensure that you have written confirmation that it will be removed or altered to positive wording from the party who mad the report in the first instance. Do not trust the collection agencies word, they will say anything you want to hear until your check has been cashed and then you will be on your own.
If the only reason you are paying off a debt is to have the negative information removed from your credit report it is of the utmost importance that you have a confirmation in writing from the original lender stating that the issue will be dealt with in a particular fashion that satisfies your needs.
So don’t just accept the fact that you have to pay high interest rates, large down payments and exorbitant fees to get into a home loan because your credit score is low. Be proactive and work on your credit report before you apply, you will be financially rewarded.