A Complete Guide to Bad Credit Home Loans
Buying a home is one of the most effective ways to build wealth.
Investments can go wrong, work isn’t often enough to save more than a little bit here and there, and many of us wind up with very little extra money. It’s tough to set yourself up financially. Homes, though, are exceptional investments that can bring you out of your current situation.
Some of us might have a hard time buying a home because of bad credit, though. Luckily, there are now brokers out there that specialize in finding mortgages for those with bad credit – badcredit-mortgage.co.uk offers more information on this.
We’re going to discuss a little bit about bad credit home loans in this article, giving you some insight into how you might be able to get a mortgage without excellent credit.
Let’s take a look at how to get a home loan with bad credit.
How Credit Impacts Your Eligibility
If you’re a first-time homebuyer, you might be a little fuzzy on how credit factors into your ability to get a home.
Your credit score indicates your “creditworthiness” to potential financial lenders. The score factors in your entire financial history from payments to lines of credit.
Credit bureaus then look at your credit history to see how statistically likely you are to pay your loan, indicating whether or not you’re a good investment for lenders to make.
Scores can be anywhere from 300 to 850. The higher your score, the more options you have for great loans.
Is Your Score Too Low?
In the grand scheme of things, you’ll be able to find a lender that will offer you a mortgage at your current score. That is unless there are some extremely damaging things listed on your credit report and your score is absolutely as low as it can be.
If that’s the case for you right now, there’s still hope. There are a lot of ways that you can improve your credit over time, and negative marks on your report typically only last for around 6 years.
Positive credit, though, stays around on your report for much longer.
If your score is hovering around 500, there are some lenders that will offer you decent mortgages, although you might not be too happy about the rates and fees. We’ll discuss how those fees relate to your score in the next section.
When you get to the 600 mark, your options start to expand a little bit and you can explore different options that might work well for you. When you’re still in the 500 range, you might have to accept whatever is available instead of making the best choice for yourself.
When you break past a score of 700, you’ll be able to get just about any loan that you like.
How Does Credit Impact My Options?
Just because you can get a loan with a credit score of 500 doesn’t mean that it will be a great setup for you.
The lower your score, the less advantageous the interest rates and fees for things like late payments. If you can get a home loan with bad credit, your interest rate might be really high, and make it difficult to cover those costs over the life of the loan.
That said, not all bad credit mortgage loans are too disadvantageous for the borrower. This is because your credit score isn’t the only indication of your creditworthiness. There are a number of other factors that come into play.
Let’s take a look at some of those.
Factors in Bad Credit Home Loans
Most lenders don’t have a minimum credit requirement, although their choices at their own discretion. This is a good thing for those who don’t have great credit because it means they can make up for their low score in different ways.
One thing that lenders find really desirable is large amounts available for a down payment. A normal mortgage with average credit only requires about 5 to 10 percent down, while those with low credit could be required to pay a little more.
That said, if you were to offer up something closer to 20 or 30 percent down, your odds of getting the mortgage would be much higher. You might also see that an extremely high down payment lowers your interest rate.
Another factor in your creditworthiness is your debt-to-income ratio. The more money you owe, the less creditworthy you are. As your income rises and your debts diminish, though, you’ll be a more desirable candidate for a mortgage.
This ratio is also a factor in your credit score. If you’re looking to improve your financial situation so that you can get a mortgage, working to cut down your debts is one of the first things you should be doing.
On that note, getting all of your debts out of collections is another requirement that you should take care of before you apply for the loan.
When You’re Accepted
If all goes well and you’re accepted for a loan with bad credit, there are a few things to expect.
The first is that your monthly bill will be relatively high. This is simply because your interest rate will be higher as a result of your credit. Even the best bad credit home loans will be a little steep on the interest rate at first.
As the risk for the lender rises, so does the interest they require you to pay. It’s a way for them to mitigate risk and better justify the financial decision to lend to those with lower credit.
One thing to keep in mind, though, is that mortgage payments are almost always lower than what rent payments in your area are.
Renting from a landlord means that you’re paying them more than their mortgage payment so that they can make money. A comparison between rent and mortgage payments of a single house shows us that owning a home is a far better financial decision.
So, learning how to get a mortgage with bad credit and buying a home with a high-interest rate is still likely to save you money each month.
At worst, you’ll be paying about the same as you would if you were renting. You’re paying yourself at the end of the day, too. Let’s take a look at why that is and how you can improve the situation over time.
Mortgage Payments Come Back to You
When you pay rent to a landlord, that money goes into their bank account and never comes back to you. When you own the home, you’re paying into the total value of the mortgage you took out to purchase it.
On the one hand, you’re just paying back the money that you owe. On the other, you’re also going to retain all of that money when you sell or refinance the house.
Selling your home before the mortgage is up is always an option. In almost all cases, the worth of your home will increase over time as the property value rises. Any improvements or renovations you make to your home might also increase the value as well.
So, when you sell, you get back the entire value of the loan plus however much extra equity was generated through your time living there. That extra money eclipses the payments you make into your mortgage and you wind up making money.
In some cases, you make a whole lot of money that would be otherwise almost impossible to generate. This is why investing in a home is such a smart financial move.
Instead of paying a landlord, you’re paying yourself and you’re making a lot of money without having to do very much at all.
If you don’t want to move but still want to access the equity on your loan, you can refinance. This is essentially the process of re-appraising the home for its current value, and getting another loan from the bank at that value.
This pays off the remainder of the mortgage that you had in exchange for a new one. The nice thing is, the equity you gained comes back as cash in hand from the loan you’re getting at the adjusted price.
What’s even better than that is the fact that you can get better rates on the mortgage when you refinance.
The time you own the home can be spent trying to improve your credit. If your credit improves, you can refinance and the bank will look at your new financial situation to determine your interest rates.
Because of this, it’s not necessarily a bad idea to invest in a home if you can’t get a decent mortgage. What matters is that your financial situation improves over time so that you can get better rates in the future.
Any way you swing it, owning a home is a better financial move than renting one. Your next step is to talk with a mortgage broker who can take a look at your financial situation and see what your options are.
Want to Learn More?
Looking at bad credit home loans is your first step to a brighter financial future. We’re here to help you look at other angles of your money management, too.
Explore our site for more insight into money, investing, lifestyle ideas, and a whole lot more.