Home buyers are passing through stringent times. Today, lenders expect home buyers to put down at least 20 percent down payment or have a flying credit score of 720 or above. But let’s be real – Not every one of us is blessed with a great credit score. So here are a few smart ways to get a decent mortgage even if you have a bad credit. But before we go ahead, how do you know if you come under the ‘bad credit’ category. Well, here’s a way – If your answer is yes to any of the below, you can count yourself in the league of bad credit borrowers.
- You have a credit score below 620
- Bankruptcy within the last 2 years
- You have a more than 50% debt-to-income ratio
- In the past 1 year, you had one loan default of 60 days on a mortgage or two or more loan defaults of 30 days on a mortgage
- In the past 2 years, you had a foreclosure
Though we don’t recommend to self-diagnose your credit worthiness. It’s wiser to speak to a mortgage professional and where exactly do you stand. Now as promised, here are the smart ways to get a loan with a bad credit.
1. Pay Higher Interest Rate
Having a bad credit does not shut doors for you rather it makes the passage a little costlier. Getting a mortgage with a bad credit is usually more expensive than getting it with a good credit. The reason is quite apparent, a person with a bad credit is a riskier deal for the lender and hence, to make up for the contingency, he offers it on a higher interest rate.
2. Make 20% Down Payment
If you are taking a mortgage that covers more than 80% of your home value, you will have to get an approval from the lender as well as the mortgage insurer. However, if you can manage to shell out a down payment of at least 20% of the loan’s value, you might not need the approval of the latter and hence thicken your chances to bag the credit.
3. Get a Co-Signer
If your bad credit is hurting your eligibility for getting a decent loan, try getting one of your close friend or family member to co-sign a mortgage with you. But before you do that, you and the co-signer need to understand that by entering into such a agreement, the co-signer will be held responsible if you stop paying your mortgage or default on your loan in anyway. It might have a negative impact on his credit score.
4. Switch to Sub-prime mortgages
Sub-prime mortgages are best understood when seen in contrast with prime mortgages. Sub-prime mortgages are given to those applicants who do not qualify for prime mortgages, mostly because their credit score is not at par. And since sub-prime mortgages are your only way out, it comes with the access baggage of higher interest rate and big upfront fees. According to the housing market analysts, sub-prime mortgages are going to gain momentum this year.
5. Keep Predatory Lenders at Bay
Buying a home is anything but easy! Getting a mortgage can be intimidating if you are not blessed with a healthy credit score. But that does not mean you make yourself vulnerable to the marketing tactics of predatory lenders. An ideal lender makes you understand the nuisances of your contract and never pushes you to sign it in haste. If a lender tells you that it’s your only chance to get a loan and you must hurry, chances are, he’s lying. One word – avoid.
6. Compare Rates
No matter how tough it looks, it’s always best to compare as many deals as you can before zeroing in on a plan. Talk to your mortgage broker, if you can’t make your way out of the choices. Never see any lender as your only resort to get a loan. Having a bad credit is not the end of the world. Always keep your options open, shop around, make a comparison and negotiate whenever you can!
7. Wait ‘n’ Watch
Bad Credit is not something you can wipe off in a day or two. Repairing your credit score takes time and takes effort. But if you are doing your bit to get your finances in order, it’s worth to wait till you raise your credit score and come in the league of preferred home buyers. Vow to act fiscally responsible in future until you have earned a decent credit score.
Why Do Lenders Lend to Borrowers with Bad Credit?
This is the most obvious question. Why would a lender be willing to give credit to such a borrower at all? Well, it’s because such borrowers are the best sources of profit for them. A lender decides the particulars of a loan on the basis of ‘investor overlays’, which refers to making adjustments to loan pricing so as to get optimum profits out of it. Needless to say, those with a bad credit are liable to bear heavier down payment, higher interest rate and more stringent terms and conditions. Apparently, this puts the ball in the lender’s court. This is precisely why he agrees to shell out his money to someone with a bad credit.