If you have a poor credit score you may already know what a struggle it can be to secure a mortgage. For better or worse, your credit score is one of the most important factors lenders consider before making a loan of any type - home mortgage or otherwise. So ever since the bottom fell out on the housing industry a few years back, getting a mortgage has been more difficult than ever; especially among individuals with poor credit.
If you find yourself in this situation you might need to wait until your credit is repaired before you get your mortgage. If you absolutely can't wait, you still might be able to get a mortgage through what are known as "poor credit score" mortgage lenders.
Be aware that securing a mortgage through one of these lenders will be more costly both upfront and in the long-term. There are certain drawbacks to having a poor credit score, and this is one of them. That's simply the reality. Nonetheless, if you're willing to accept a more costly loan and more stringent requirements, you can still get a mortgage under most circumstances. The key is knowing what to look for and how to apply.
The Bank's Point of View
Before discussing what you should look for and how to apply, we first need to discuss the bank's point of view in terms of your poor credit score. Your credit score is a numerical representation of how well you have handled credit in the past. The lower the score, the poorer your past performance. The opposite is also true.
This means that a bank checking your credit score before lending you money for a mortgage is checking on your past credit history. If you have demonstrated that you do not handle credit properly, it stands to reason that you cause fear and trepidation in the mind of the individual reviewing your mortgage application. The bank does not want to risk hundreds of thousands of dollars on a mortgage for someone who is not dependable. It's as simple as that.
Different Types of Loans
With that out of the way, various banks and mortgage lenders do have programs in place designed for individuals with poor credit scores and past histories. For example, one of the most common is known as a "no verification" loan. With this type of mortgage you are not required to disclose your employment, income, or assets. At the same time, the bank also does not verify your credit score either. Instead, you use collateral as a way to convince the bank you will not default. If you do, this collateral can be seized along with your home to pay the outstanding amount of your mortgage.
Another type of loan, which is actually the most popular among those with poor credit scores, is the FHA loan. The FHA mortgage is one that is backed by the U.S. Federal Housing Administration.
Despite what many people believe, an FHA mortgage is not provided by the federal government; rather, the federal government merely guarantees that the money will be paid to the bank even if the homeowner defaults. One of the reasons these types of mortgages are so attractive to those with poor credit lies in the fact that the poor credit doesn't count against you if you have legitimate and verifiable reasons for it.
As an example, your credit score and history might reflect several late payments on a car loan and your credit cards. But if you can demonstrate through documentation that an extended illness kept you out of work, and that illness resulted in the late payments, those late payments will not be counted against you in the credit review your mortgage lender undertakes. The FHA backing of the loan makes these things less of a problem because the bank has the government guarantee of payment.
There are other types of loans you can apply for if you have poor credit score, including the 80/20 loan and the USDARD loan. Your mortgage lender will have information about all the different types of loans available to you. He will also be able to recommend what is best given your circumstances.
Applying with Poor Credit Score Mortgage Lenders
If you are an individual with a poor credit score, applying for a mortgage can be a little bit tricky. First and foremost you need to be very careful of what are known as "predatory lending practices." These types of lending practices tend to take advantage of those with poor credit by instituting unreasonable terms. Such terms may include excessively high interest rates, no grace periods for missed payments, balloon payment requirements, and so on. Even though federal legislation outlawed predatory lending some years ago, there are still lenders in the business who have found ways around the law and continue to practice predatory lending.
Next, you need to take a look at several banks and mortgage lenders in the same way you would shop around for car insurance - or any other big-ticket item. Not every mortgage lender is going to give you an equally attractive deal. It's a good idea to fill out pre-approval applications just to get a baseline of what different mortgage companies are willing to offer you. As long as you do not sign a committal agreement, any pre-approval applications you submit will come with no obligations.
When you do apply for a mortgage you absolutely must read all the paperwork down to the very last punctuation mark. Before you ever sign an agreement you need to be sure you understand what it says. You can always invoke the services of your real estate lawyer to look over the documents if you're not confident about their wording, but make sure you know what the loan agreement says one way or the other.
Be Prepared - It Will Cost You More
Even though there are loan programs available for individuals with poor credit score, be prepared that it will cost you more. You are going to incur:
- higher interest rates
- higher closing costs
- a requirement for private mortgage insurance
- shorter grace periods
- higher loan maintenance fees
No matter how you slice it, having a poor credit score will mean that your mortgage will cost you more money. There's really no way around it unless you're willing to forgo purchasing a home until you've had sufficient time to repair your credit. Fortunately, even if you get your mortgage with a poor credit score, you can always rebuild your credit and then refinance the mortgage. Regardless of how poor your credit is, there are always ways to build it back up if you're willing to work at it. A poor credit score is nothing in the world. It's simply a challenge that needs to be overcome.