Once you've messed up your credit, it's easy to think that you're never going to be able to buy your own home. But the reality is that the best way to start improving your credit history is to get a bad credit mortgage loan.
Lenders are always going to want to know what's on your credit history. With bad credit, lenders get nervous and are unlikely to want to risk lending you a large enough sum of money to buy a home. The good thing about a bad credit mortgage is that they don't care - they're expecting you to have bad credit! So the question is, how do these loans work?
Basically, when you apply for a standard mortgage, the lender will undertake a rigorous qualifying process. They will look at your finances, savings history, income, assets, liabilities, and more. If anything in your finances doesn't look quite right, chances are they're going to say no.
With a bad credit mortgage, it's completely different. Most of the responsibility is now on your shoulders - the lender's criteria are likely to be much easier. But having said that, you don't have the safety of knowing that you can afford the loan, which is something you know for sure if a standard lender gives you a loan. So you need to be extra careful that you don't get carried away and borrow more than you can afford to repay, because you'll end up in even more trouble.
Sounds great, right? Well, yes - up to a point. But obviously lenders that specialise in bad credit mortgages don't just do this for fun. They're taking a big risk on you, and they make sure they're compensated for taking that risk, as well as limiting that risk as much as they can. Here are some of the things to think about if you're considering a bad credit mortgage.
Interest Rates
It's inevitable that you're going to be paying more interest for a bad credit mortgage loan - quite often a LOT more. These lenders know the risk they're taking, and they make you pay for it. This makes it even more important for you to think very hard about how much you're going to borrow. The higher interest rate is going to make the payments higher, and you may be better off reducing the amount you borrow until the payments are more affordable for you.
Loan Limits
Discount points in bad credit mortgage loans are common. Borrowers with good credit may not have to pay for these on their loans, or only a low percentage if they do. For borrowers with bad credit, the limit is usually four or five points on their bad credit mortgage loan.
Down Payment Size
To try and limit the risk, the lender will want to see a much higher down payment than you may need to pay with a regular loan. Again, this is because the lender knows that if you default, they have a much better chance of recovering their money by selling the property, if they've only lent you a lower percentage of the house's value. This does have a good side though - a smaller loan should mean lower repayments, and if you're disciplined, you may even be able to pay a little bit extra off the loan each month. This will help you improve your bad credit rating.
The bad credit mortgage loan industry is growing rapidly, making it even easier to find a lender who will be willing to help you buy your own home. Try and get personal references from friends or family who may have used a bad credit lender, or spend some time searching the internet and comparing the types of loans offered by different companies. Make sure you have a very clear idea of how much you want to borrow, how much down payment you have available, and how much you can afford to repay monthly.
Taking out a bad credit mortgage is a big decision, and one that requires a lot of thought. It can be expensive, but it can also be a great way to start the process of getting your credit back on track. Make sure you discuss the idea with someone you trust, preferably someone with financial experience.
Find out more about choosing the best home loan at Home Loan Zone Central