Many first-time potential home buyers dream for years of the day when they will finally insert
their key into the front door of their first home. After planning, saving and more planning, along with
hours spent real estate shopping, do you want your dreams to fail simply because of a bad credit score?
While bad credit is not uncommon, it can certainly take a toll on a potential homeowner’s mortgage application. It can discolor the potential lender’s view of them, even if they have all other paperwork and finances in order. If you feel like your past bad credit is coming back to haunt you through the home-buying process, or maybe it’s going to come up in discussions, you can take a proactive approach and mend your credit before you apply for a home loan.
If you don’t have time to spare and need to apply for a mortgage right away or let your dream home get away, you don’t have to depend on traditional lenders for financing. You can look for private mortgage lenders for bad credit who will review applications otherwise tossed in the waste basket at a large chain bank organization.
First, you should understand what defines a bad credit score, where your credit ranks and what you can do to solve this issue. Whether you fix it now or later, you must repair your credit to receive many benefits in the future, such as lower interest rates on credit cards, auto loans and more. You can also avoid many hidden or sudden fees that bad credit applicants may have to pay by increasing your number and leaving no doubt in lender’s minds that you are the borrower they are looking for. Also, learn about the alternate mortgage options you have if you’d like to buy a home in the meantime, and maybe even use that loan payoff process to raise your credit score as well. Keep reading to find out all of this information and more.
What Qualifies as a Bad Credit Score?
Credit scores can fall anywhere from 301 to 850. Some credit rating systems score potential borrowers on varied scales, with scores exceeding 900 but most Americans who apply for credit will have a score hovering around 687 anyway – the nationwide average. If you have never checked your credit or even applied for credit, do not assume your score is good. Those with no credit histories will have bad credit scores. Those who have paid no attention to their credit for years can also have terrible credit scores.
This is true even if both of these types of people have limited debt, consistent income and savings. A credit score is a changeable, malleable measurement of how much of a risk it is for a lender to give you repayable cash. Sometimes a credit score doesn’t tell the whole story, but sometimes it does. That’s why it’s important for you to analyze your credit, make sure it’s accurate and improve it as much as you can over time.
Credit scores are broken down into multiple ranges. Any credit score that hits 750 and goes upwards is the best a borrower can do. 750 and anything higher is considered excellent and the borrower will be able to score the lowest interest rates, the most minimal fees and the best offers from all types of lenders. Good credit borrowers also received many benefits, with scores ranging from 700 to 749. The benefits start to dip once the borrowers’ credit scores below 700. 650-699 is only considered “fair” or “acceptable” and under 650 is labeled bad credit. If the score dips even lower into the 500’s? That is a real problem
and the borrower most likely will not be a borrower, since they will not be approved for much, if anything at all when it comes
How Can You Tell if You Have Bad Credit?
One of the main challenges in handling bad credit is knowing where you stand. It should be easy for
consumers to immediately know their credit score. If the lenders can look up their credit any time why
can’t the borrower? Actually, you can look up your credit report, even though you might not be aware – many people aren’t.
First, go to AnnualCreditReport.com and request one of the three free copies of your credit report you
are eligible to receive each year, by law. They will come from one of three main credit bureaus: Equifax,
TransUnion or Experian. It’s important to note that a credit report is much different than a credit score.
While the score tells you the actual number you are ranked, credit reports do not. The report will simply
detail each one of your open credit accounts with a full history of payments and other characteristics of
your borrowing patterns. It will list how many inquiries you made within certain time frames as well as
how much you still owe on each account in relation to the total amount of credit allotted.
Credit reports can give you major insight into how and why your credit score is good or bad. You may think you paid off a past open account balance only to find the account was never closed. Maybe it was sent to collections without your knowledge and now you can track down the creditor and remedy the problem. Speaking of problems, many credit reports show mistakes that can ultimately seriously affect you. The bureaus will not correct mistakes unless you alert them to the issue, and you can’t possibly know if there is a mistake unless you view your report – hence the need for a constant monitoring of your credit.
If you simply want to find out your credit score, sign up for free credit monitoring service with your current credit card. Many credit companies or banks now offer their customers the option to view their FICO credit score on each of their montly statements. This can also give you an instant idea of how your credit looks to a potential lender. If you see a sudden dip one month, pull your credit report to understand the reason why.
How to Build Up Your Credit Score
Ideally, you should do your best to improve your credit before you turn to a mortgage lender. Sadly, there is no real fast way to do this. Of course, writing letters to the credit bureaus when you spot mistakes on your report is vital, and can influence an immediate change the following month if a lender views your credit report after the mistake has been corrected.
However, if you were consistently late on auto loan payments, credit card bills and other types of monthly charges, the only way to turn your reputation around is to be consistent in a different way by making all of your payments on time. If you’ve struggled with this goal in the past, maybe setting bill pay reminders could help you keep your budget in focus. You can also try reducing the total amount you owe on each of your individual accounts. Utilizing only 30 percent of your total allowed credit or less raises your credit score. It shows you COULD borrow more, but you’re choosing not to.
Varied Mortgage Lending Options
When it finally comes time to apply for that mortgage for that dream home, your credit should be in the best shape it can possibly be. But if it isn’t, don’t worry. There are options in life for everything, including home mortgages. Private mortgage lenders for bad credit applicants have much less stringent requirements than a big bank might, even though the big bank might be your first choice. If you do decide to try your luck with a big bank, prepare for a long process.
Applying for a mortgage isn’t simple, especially if your credit is less than perfect. Prepare for them to ask specific questions about your credit report, your credit score, your income and all of your assets. They are going to want to know exactly how much money you have for a down payment. They will want to know how much you want to borrow and if the subsequent monthly payment is going to fit into your
housing budget. Do your homework before you visit a big bank, or else you will be left scratching your head and wondering why they didn’t approve you.
Before you automatically turn to private mortgage lenders for bad credit, look at what other government sponsored mortgage programs have to offer. For instance, you could qualify for an FHA loan with no money down even if your credit is poorer than average. If you are a military veteran, a VA loan will allow you the same benefit. If you have already bought a home but went through a foreclosure, VA loans only require you to wait two years before buying again, and FHA loans require a 3 year waiting period.
You can also try applying for a mortgage at a local bank or credit union. They may be more likely to look at all factors involved in your application rather than just at your credit score. You can explain your past, present and what your plans are for the future and hopefully get approved for a reasonable rate in the amount you desire.
If these options fail, look for private mortgage lenders for bad credit consumers. Private investors can back all kinds of loans, including home loans, but the length of the loan will not be as long as you might expect from a bank. This means your payment will also not be as small. Additionally, you should always receive legal counsel before entering into any private lending situation, as the fine print on such contracts can be confusing and the specific terms unique.
What Do Mortgage Lenders Look For?
In general, mortgage lenders of all kinds look to approve potential borrowers who showcase certain characteristics. Obviously, a good credit score is a positive that will work in your favor. Besides that, what else is important to a potential lender, whether it be a credit union or a private mortgage lender catering to those with bad credit?
Bad credit, good credit or no credit, mortgage lenders want to know you have a consistent income. They’re going to ask how long you have worked at one company in your field and what your overall monthly take home pay is. Besides loans that offer funds to those with no down payment, they also want to see that you’ve had the ability to save money. If you have no savings and lots of debt, that doesn’t spell success to a mortgage lender.
Consider a Co-Signer and Expect Higher Costs
Any potential borrower with unattractive credit should expect additional costs when applying for a mortgage, even if they opt to work with private mortgage lenders for bad credit. They are going to have to pay either a higher interest rate, more fees in lieu of a large down payment or meet other conditions that will be costly to them in the long run. In some cases, acquiring a co-signer with good credit can offest the risk to the lender slightly, resulting in more good credit benefits, but sometimes this isn’t enough for
lenders to cut any borrower a break when it comes to home mortgages.
Advantages of Using a Mortgage to Improve Your Credit
If you do decide to buy a home before completely repairing your credit, you actually might benefit from your efforts in the long run. While it will be more complicated to find private mortgage lenders for bad credit applicants like yourself, making monthly payments on the loan will only make your credit score rise. On the other hand, paying the rent to your landlord every month most likely will not show up on your credit report. Also, you’re building capital in your name as you pay off your home, one of the most important assets you will ever own. Whether you choose to work with private mortage lenders for bad credit or just work on your credit first, focusing your efforts on improving your financial standing in general can only afford you less stress and financial concern in the future.