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There is no hard requirement to keep a bad credit mortgage for any prescribed period of time. However, you should probably plan to keep this financing for at least one year and possibly two. It will take a while for you to effectively repair your credit, usually six months to one year, if you start immediately. Sometimes circumstances require a longer period of time, depending on your cash flow, debt level, delinquency status, and current/future income situation.
A one- or two-year fixed rate mortgage (that switches to an adjustable rate mortgage thereafter) should give you the necessary time frame to fix your credit situation. The critical issue is your willingness and commitment to solve your credit problems. No action on your part will eventually result in greater disaster, as in the loss of your home. Do not believe that getting a bad credit mortgage is the resolution to your situation. Be prepared to keep your new mortgage for a year or two, during which you take all actions possible to correct your credit problems. This will allow you to refinance at the best available interest rates and terms as soon as your credit report returns to a good status.
You can still use the Internet to search for a bad credit mortgage. You will learn of most of the products available to you. Most bad credit mortgages require the same documentation as normal mortgages, but you will learn of any special requirements of sub-prime mortgage lenders. Be careful about applying for a bad credit mortgage through the Internet. Try to determine the estimated closing costs of any loan you consider. Some sub-prime lenders will attempt to take advantage of your credit situation to increase their income. This is only natural but the last thing you need is higher cost to close the loan. Try to deal with a lender that understands your situation and, while they will charge a higher interest rate, at least one to three per cent than current good credit rates, will still give you the mortgage you need without expecting higher closing costs. Compare and examine all Internet mortgage products. If you feel uncomfortable with the information given to you, move on to another source.
As you know or might learn, there are numerous problems that will exist if you have bad credit. They are more damaging when you are attempting to get a mortgage. First, many people wait too long to refinance their current mortgage. Do not wait until your credit report has degenerated to a disaster level. If you are getting into credit problems and can't immediately fix them, refinance your home quickly while you still can qualify for a decent rate and might generate sufficient cash to fix your declining credit. If you have already waited longer than you should have, you must try to save your home at all costs IF you can get a mortgage that you can afford.
With bad credit, you will have a limited ability to get other loans, either credit card or installment, which otherwise might have helped you fix your original credit problem. This may leave a bad credit mortgage as your only choice. Understand that it will be expensive, one to three per cent higher than current interest rates, but may be your only option. Your equity in your property is real and serves as an untapped resource that you may need if things get worse. Again, do not assume that you will be able to get a good consolidation loan to solve your problem since your credit problems may make it impossible.
The solution: a) Design a plan – and stick to it at all costs – to fix your credit in the next six months to one year. b) Refinance your property at the best terms available to you and use any available proceeds to begin your credit fix plan.
You will need the same documents for a sub-prime (bad credit) mortgage as you do with a regular mortgage. The one major document you will need is a clear letter of explanation (LOE) of your current credit situation. While you must fight the temptation to be overly dramatic, with tear stains, etc. But you must effectively “paint a picture” of the reasons for your current plight. A mortgage underwriter will put great weight on your LOE in his/her recommendation for approval or rejection.
Some people believe that simply because the mortgage lender will earn a higher interest rate because of your bad credit situation, you will be approved no matter what the documents indicate. This is not true. Mortgage lenders cannot worry about the extra income to be earned on a bad credit mortgage loan if they have doubts that their loan will be repaid. You must give them confidence that your problems are over, even if your credit report does not yet reflect it. They must believe that your current situation has improved and allows you to repay their loan.
You will still need your W-2's or 1099's from last year, probably 2 current pay stubs, verifications of your current mortgage and other outstanding loans, and evidence of the ability to escrow tax and insurance payments or at least the ability to make all principal, interest, taxes, and insurance (PITI) payments going forward. If you convince your lender you can make the required payments AND that your credit problems are a thing of the past, you should have the ability to get the mortgage you need.
While many of your closing costs are specified by law, government regulation, or third party standard charges, you may find you are required to pay higher closing costs because of your poor credit. The most critical areas you should examine are the following.
You can still get a fixed rate mortgage if you have bad credit. The rate will depend on just how “bad” your credit is at the time of application. You might have to accept an interest one or two per cent above the normal good credit fixed rate and you should think carefully if this is what you really want. The reasons for your less than perfect credit are crucial to your decision to apply for a fixed rate versus an adjustable rate mortgage.
Be honest. If you are simply living beyond your economic means and are habitually lackadaisical about making your required payments on time, you might be better off with a fixed rate, even if it is higher than it need be. If, however, your current situation is caused by income disruptions, medical bills, or other issues that should be corrected in the near future, you might be better served with an adjustable rate mortgage loan. The rate will be lower for a while and you might be able to correct your credit deficiencies before the rate escalates. If you can, you might once again qualify for a lower fixed rate mortgage in the near future.
Most mortgage loans are classified based on your FICO score (credit score). Bad credit is a subjective decision, not a pure mathematic interpretation. If your credit score is less than 620, you might “qualify” for a bad credit designation. Hopefully, your report does not show a mortgage delinquency as part of your score as that will further hurt your ability to get a reasonably priced mortgage. If you have sporadic 30-day delinquencies on plastic card accounts, you should still qualify for good mortgage terms. However, should you have a variety of 60-day delinquencies on some of your accounts, this will pose a problem. If you have one or more 30-day delinquencies on installment loans (for instance, auto or student loans), your score will fall further than unsecured accounts (plastic card). Should your report include one or more 30- or 60-day delinquencies on a mortgage loan, you have truly reached the category of “bad credit."
Have you had late payments for car loans, medical bills, or any other service? If so, you may only be eligible for higher risk mortgage loans when you go to buy a house. This is not the end of the world. Today, securing a mortgage with bad credit is easier than it has ever been. Here are a few tips on getting a mortgage with bad credit.
Mortgage interest rates are as low as they have been in decades. Yes, they have gone up slightly in the last year, but today's rates are still lower than have been seen in recent history. These low rates are across the board. That is to say that even with bad credit mortgage loans, the interest rates are comparatively low to what they were years ago. For people looking for the lowest rates on bad credit mortgage loans, the key is in shopping around.
The best place to start is on the Web. Applying at sites such as our sponsor's will present you with a range of bad credit mortgage loan offers for you to compare. You will see that the rates vary greatly depending on the lender and there is still room to move even with bad credit. Do not sell yourself short simply because of credit problems. Settling for the first loan you can get approved for with bad credit would be a big mistake. If you are facing a bad credit situation and want to get a mortgage, keep at it. Do not settle for a loan that you are not comfortable with. Even with bad credit there are options out there for you.
Credit is something that most of us take for granted until it is too late. What college student can truly appreciate the loans that they take for their education? Or the credit cards that they use for those ‘essentials'? The truth is that very few do and they go on to find out that they when they want to buy their first homes, they are only eligible for a bad credit mortgage.
A bad credit mortgage isn't the end of the world, but wouldn't you rather get the best rates available? You can get a head start at avoiding the bad credit mortgage by fixing your credit now and keeping it clean in the future. Today, fixing your credit is a fairly simple process. Even if you find it too difficult to do on your own, new companies are available each day that specialize in fixing credit.
If you are already trying to find a home and are only eligible for a bad credit mortgage, find a good lender who will work with you to repair any credit issues. Many mortgage brokers will often help you repair any credit issues to qualify you for a better mortgage loan. If possible, take advantage of these services. Don't pay a higher rate than you have to. Clean up your credit and keep it in order in the future and you will avoid needing a high interest ‘bad credit mortgage'.
So, the time has finally come where you have repaired your credit. Now, the most important thing to do is to get out of all of the obligations that you got yourself into when you had those credit problems. Namely, if you took on a bad credit mortgage, this is when you need to refinance it. A bad credit mortgage probably came with a high interest rate and poor loan terms. If you have repaired your credit and could now qualify for an ‘a paper' loan, get with a mortgage lender as soon as you can to lock in a lower rate and refinance.
For people who got into a bad credit mortgage but are now ready to get out, get ready for a new world of lending. You will see the difference in the response you receive when the lender sees a 700+ score. As opposed to when you got your bad credit mortgage, now, they will offer you even more money than you want. It is important to remember how you got back to a good position however, and not go crazy with this new found ability to borrow. Stay conservative in your refinance and you will never be faced with needing a bad credit mortgage again.
It is sometimes tough to see the light at the end of the tunnel, but when it comes to repairing bad credit, it is important to never lose sight of it. Many people find that they are in a bad credit situation and think there is nothing that they can do to make it better. It will often scare them out of things such as a bad credit mortgage. Maybe I am just a ‘half full' type, but there are definite advantages to taking on a bad credit mortgage if you are facing this situation. The biggest advantage of taking on a bad credit mortgage is that it will actually help repair your credit in the long term.
Bad credit does not last forever unless you continue making bad credit moves. If you assume a bad credit mortgage and make prompt payments on it, this will reflect on your future credit rating in a bigger way than almost anything else. Another advantage to a bad credit mortgage is home ownership. No matter how you get into home ownership, everyone should get into it. If it takes a bad credit mortgage, than that is what it takes. But the advantages to being a home owner and the equity that you can quickly build cannot be replaced. If you have credit problems, do not let them dictate the rest of your life. Get that home you are looking for with a bad credit mortgage and in a few years you can refinance it into an ‘A Paper' loan with your established payment history and improved credit rating.
The great irony in today's mortgage market is that even someone with bad credit today, can improve their payment situation over an ‘A Paper' loan that they secured in 1987. Basically, even the lowest rates from years ago are higher than the highest rates available today. This has led to the refinance boom that has been going on for the last several years. If you have current credit issues but still want to know if refinancing your home would be a good move, talk with a broker about refinancing your mortgage with bad credit. You can even start on your own.
Get a hold of a mortgage calculator and do the math for yourself. Use it to compare your original mortgage rate with one you could acquire today on a mortgage with bad credit. You may find that even in the face f your current credit problems, you can improve your rate and reduce your monthly payments greatly. Don't waste another day being scared of your bad credit. Look into refinancing your mortgage with bad credit and improve your monthly housing expenditure.
If you are looking for a mortgage and have previous credit issues, you may find that bad credit mortgage loans are the only option available. The important thing to remember is that even a bad credit mortgage loan will help you build that credit back up for the next mortgage loan you wish to secure. Applying for a bad credit mortgage loan is simple.
Here are a few of the best ways to prepare for the application process:
So, you are looking for that new home and you are being told that you cannot qualify for any ‘A-paper' loans. If you have credit issues, often bad credit mortgages are the only option to get you into that property you want. Finding bad credit mortgages is easy if you look in the right places. Fortunately, the Internet has opened new doors to the credit challenged. Online lenders can offer a larger variety of mortgage options than traditional mortgage lenders or brokers. This includes a larger selection of bad credit mortgages. Because most online lending is done through partnerships between multiple lending institutions, they can ‘team up' to offer a variety of loans, including bad credit mortgages.
If your local lender has told you that you can only qualify for a bad credit mortgage, stick to the Internet when you are done reading this to find the best selection for you. You can start with our sponsors to find a wide variety of bad credit mortgages and options. If that doesn't work for you, don't give up. Jump onto the major search engines and shop around until you find the best option for you.
Nobody entering into home ownership is bound to a single mortgage option. Even with bad credit mortgages, there are options that you should compare to make the best choice. If you are looking into bad credit mortgages, here are a few things to look out for.
The best way to fix your credit brings to mind a cliché that remains true: Make a plan, and then work your plan. Unless your credit report deficiencies are the result of a severe onslaught of medical bills or an abrupt loss of income, your situation probably took some time to develop. You should understand that it will also take a bit of time to rectify. It will happen fastest if you have a plan to consolidate your debts to make the monthly obligations more affordable or to set aside more available cash to catch up on delinquent obligations. Either of these plans will work.
Please realize, however, even after you are up do date with your obligations, there will still be another 60-90 days before your credit report will be updated since your creditors only report once every 30 days and cannot report your new and improved credit status until after your efforts are complete. They must first receive and record your payment(s) that bring your account up to date then wait until the end of that month to electronically report this new information to the credit bureaus. That is why a consolidation loan is the fastest way to fix your credit.
But, you must be careful. Do not accept a loan that may only make your situation worse in the near future. You must get advantageous terms to make this work. Also, your credit situation may prevent you from obtaining an excellent consolidation loan. Then, using a solid plan to make higher than required payments to “catch up” may be the best option. Be patient and committed to fixing your situation – and you will.
Even if you have bad credit, you have some excellent options for obtaining a mortgage. You should know however, that many major lenders have put more restrictions and or change terms in many of their “sub – prime” mortgage products. Rapidly rising delinquency rates have brought about these changes. You still have some workable options, however.
You should first examine the reasons for your bad credit and what your plans are to fix your situation. You will have the option of selecting fixed rate for adjustable rate mortgage loans. However your rate will reflect your current credit situation. If you have designed a plan to correct your credit deficiencies, your best option may be an adjustable rate loan with your beginning rate fixed for the first two or three years. That time frame should provide you sufficient opportunity to rebuild your credit.
Prior to the first adjustment date you could then refinance at a much lower interest rate, fixed or adjustable. However, if you are in a financial situation that will take longer to correct, your best option may be a 30 year fixed rate loan to avoid any unpleasant surprises that could only worsen your predicament. You will receive an interest rate approximately one to three percent higher than the current best available rate but your immediate problems will be solved. The rest is up to you. Take whatever action necessary to correct your credit situation and refinance your loan at the earliest opportunity.
Thanks to the secretive nature of credit reports, most of us have no idea if our credit scores are high enough to obtain a loan. Oftentimes, people don't find out they have an issue until they apply for a new credit card, a car loan or a mortgage. Unfortunately, this is often too late and will most likely result in a debtor looking for ways to correct their credit report. The fact is, consumers have access to their credit reports one time annually at no charge.
Requesting your report
One time annually, you should request your credit report. This can be done by contacting each of the three credit bureaus by mail by sending a letter to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. This will generate a report from each of the three credit reporting services unless you specifically request only one. Consumers should also be aware if they are turned down for any type of credit, they are entitled to request a copy of their credit report regardless of how much time has past since you requested it the last time.
Review and confirm
Once you receive your credit report, it is important to review everything on your report. This includes your place of employment, spouses name, address and all outstanding credit lines. Any errors should be reported immediately, in writing, to the credit reporting agency. Taking this important step can help insure you do not get unfairly turned down for a loan.
Your credit report must remain accurate for a number of purposes. In fact, some people have been turned down for employment based on data obtained from credit reporting agencies. Every consumer should understand their rights to obtain their free credit report as well as their right to dispute inaccurate information.
Many homeowners face trying times that deteriorate their credit after purchasing their homes. Luckily, they were able to secure a good first mortgage loan. Now, however, they will be unable to qualify for the same type of loan terms. This is often a ‘Catch 22' scenario where the only way to better their credit is through using home equity to pay off the problem accounts on their credit reports. There is a solution to this and it lies in a bad credit second mortgage.
A bad credit 2nd mortgage is a smart move if it will help build your credit back up. Because most second mortgages are for relatively little money, the higher interest rates that come with a bad credit second mortgage will not break the bank. This is a valuation that has to be done on an individual basis. If your situation would be improved with a bad credit second mortgage, apply now and don't spend another day in bad credit limbo.
Seek the assistance of a mortgage broker. While many do not provide bad-credit financing, many do have an affiliate who will. Ask them for a reference.
Secondly, have a mortgage broker determine if your credit is really too damaged for any of their programs.
Word of Advice: Many will prefer to re-write the entire loan. Second-mortgage lenders have reduced security by nature of being in the second position. A total refinance may be the route you have to take. Considering the cost of a first and second, it may be the better method.
|Jennifer Mathes, Ph.D.|