How to Get Good Mortgage Rates Even With Bad Credit
Save for a larger down payment
Control your debt to income ratios
Stay in Your Current Job
Seek Creative Financing Options
Add Someone to Your Mortgage Loan
Remove Someone From the Mortgage Loan
First, if you're thinking of purchasing a home within the next few months, begin now to be very careful about bill paying. Do your best to see that every bill is paid before the due date, so there can be no questions.
When a lender looks at a credit report and sees "lates," the recency of those incidents does play a part.
The second step is to get rid of any outstanding collections. Sometimes there's a reason why you really don't want to pay a bill - but not paying it will hurt you more than it will benefit your creditor when you want to take out a home mortgage loan to buy a house.
Save for a larger down payment
The more you can put down, the better your home mortgage interest rate. This is true even for borrowers with excellent credit. In addition, when you can put down 20% or more, you'll avoid the PMI (Private Mortgage Insurance) <link to "What is Private Mortgage Insurance" please> thus allowing more of your money to go toward principal and interest. That could mean buying a more expensive house, opting for a shorter loan term, or just having more money in your pocket at the end of the month.
Control your debt to income ratios
Your risk factor is partially determined to how close you are coming to maximum debt load. As a general rule of thumb, you should not spend more than 30% of your income on your house payment, but some lenders will let you stretch it to 40% if you are not loaded with other debt.
Try to pay off small debts that add up, so that lenders can see that you can not only afford the house payment, but should have a little money left over after meeting all your other obligations and living expenses.
Stay in your current job
It's tempting to switch jobs to try to earn a higher income, but don't do it until after your home mortgage loan has closed. Lenders look at job stability and years on the job when determining your credit worthiness. If you absolutely must change jobs, stay in the same line of work. Do not go from being a secretary to a sales person, or from a truck driver to a carpet installer.
Seek Creative Financing Options
Mortgage companies offer such a wide variety of home loan packages that there is one for nearly every situation.
One option for the borrower who is temporarily saddled with bad credit is the "2 - 28 Variable" loan. Under this program you close your home mortgage loan with a fixed rate for the first two years, after which the loan rolls over into a variable rate mortgage. Lenders also offer this option in "3-27" and "5-25."
The "2-28" option carries a lower interest rate than the other choices, because you'll be paying higher interest sooner.
This could be a wise choice because most credit can be repaired within two years, and then you will either be able to handle the larger, variable rate payments, or will be able to refinance into a fixed rate home mortgage loan at a lower interest rate.
The danger, of course, is that rates could go up over those two years and you'll have to refinance at a less desirable rate even if your credit score has risen significantly.
The other danger is that if you don't repair your credit, you'll be stuck with either the variable rate or a higher rate for refinancing your mortgage.
Your Mouse House Mortgage Counselor will help you explore the many home mortgage loan options and choose the one most beneficial to you - now, and for the long term.
Add Someone to your Mortgage Loan
Do you have a parent, a sibling, or a child with good credit? If your current financial problems are justifiable, one of them might be willing to co-sign your loan and help you qualify for a lower rate. Discuss this with your Mouse House Mortgage Counselor.
Remove someone from the Mortgage loan
If you need two incomes to qualify for the home loan, this isn't an option. But if one spouse with good credit has enough income to qualify without the "bad credit spouse," go ahead and apply for your mortgage loan with the "good credit spouse' as the only borrower.
Depending upon the laws in the state where you reside, you may have to have a special document prepared for the other spouse to sign. It states something to the effect that he or she knows you are encumbering the house you share and approves the transaction. You may, in some cases, need a quit claim deed instead.
This plan is risky if your partnership is shaky - but given two spouses who trust each other, it can be beneficial to all concerned. When your lower interest rate can save $100, $200, or even $300 or more every month, this isn't the time for fragile egos!
Mouse House Mortgage is a free service for people who are looking for a
mortgage loan with favorable rates, whether you have excellent credit or bad
credit. A friendly mortgage advisor will help you navigate your options and
access the best mortgage rates for your situation.
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