Article provided by: Steven Crews | BOSI Financial
Securing a mortgage when you have bad credit can be challenging but not impossible. Converse to popular belief, you can still get a mortgage through tailored programs specifically for people with poor credit. Some lenders specialize in mortgages for people with bad credit. They are known as adverse credit mortgages, bad credit mortgages, or sub-prime mortgages.
Examples of bad credit?
Some situations on a credit report would make lenders think a person is a high risk. These include:
- Any person with no or little credit. They do not use credit cards and never had an auto loan; hence, they do not record to base the credit scores on.
- Persons who have defaulted in paying their bills. A single late payment will not hurt much as a pattern of several missed payments. Also how late your payment is matters. A single late payment for more than 90 days will have more significant adverse effects than several late payments done after a month.
- Borrowers with too much debt. If you max out your card, your credit score is hurt even when you make payments on time. Avoid carrying a balance that is 25% greater than the limit on your credit card.
- Borrowers who referred their loan for collection or defaulted. This pushes one straight into bad credit territory.
- Anyone who has been through bankruptcy or foreclosure.
The pricing of bad credit mortgages
A bad credit mortgage works like the standard mortgage but with higher charges and interest rates.
Most people with bad credit go for mortgages with fixed rates. However, you can choose between variable rates or fixed-rated deal mortgages.
The interest rates on this mortgage are high because the lenders have fewer reasons to give a considerable amount of money at lower interest due to your credit history. So in return for taking a high-risk client, they ask for large deposits and high interest rates.
Typically, the size of your deposit will be at least 15 percent of the total value of your property. However, if you can get 30 percent or higher, it may improve your chances of approval.
With a bad credit score, you expect higher costs when:
- Your loan is more than the county’s conforming loan limit
- You do not have a 20% down payment
- You are refinancing to lower your monthly payment.
When you have a less than 20% deposit, your lender will require you to pay a mortgage insurance premium. On an annualized basis, you will need to pay private mortgage insurance of 110 %.
What is the lowest credit score for a mortgage?
There is no particular credit score set for one to get a mortgage. This is because there is no standard credit score that lenders use. Instead, every lender will go through your credit record and employ its credit scoring.
To improve your credit score with lenders, you can
- Pay utility bills on time.
- Pay off loans and credit loans. You can also close down credit cards that are not in use.
- Avoid missing payments for credit cards and loans.
- Get on the electoral roll.