Bad Credit and Home Loans

Bad Credit and Home Mortgages

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If you have bad credit, you still have a chance of getting a home loan — but having bad credit is a virtual guarantee that getting a home loan will be more difficult. There is no firm, hard line between acceptable credit and bad credit, but if you know you have had a questionable credit history, it's likely that you will eventually have some kind of credit difficulty.

A low credit score essentially guarantees that you will pay higher interest rates on home mortgages. How much more you'll pay depends on a number of factors, and it all starts with your credit report. So if you are not familiar with your credit report, make a point of requesting one before you decide getting a home loan — and fast.

Home loans for those with bad credit

It's likely that a person with a low credit score, say, below 600, will likely receive mortgage interests rates that are nearly 3% higher than someone with a score above 700. And what does it take to put credit levels at a bad level? Factors like late payments, foreclosures and bankruptcies make it difficult to get out of a bad credit hole, but even then, you can still obtain a home mortgage. You'll just need a lot of patience and time and access to a mortgage calculator. Having a solid credit plan is vital to obtaining a mortgage you can afford long-term. Mortgage calculators are available online and can help you devise a solid payment plan that works best for your budget.

Can I consider refinancing if I have bad credit?

In the simplest terms, try to think of refinancing as points vs. rates. Let's say you have a loan balance of $300,000 at a 6% mortgage rate. Since lenders tend to cover their risks when it comes to making a profit, they usually approach your home mortgage loan in one of two ways:

  • Through the loan's interest rate
  • Through upfront fees called "points"

So when it comes to refinancing, your decision should be based on how much money you will save by paying now ... or by paying later. And this usually has to do with how long you plan to take to pay off the loan.

Using the example of a $300,000 home loan, let's say a lender offers you either a 5.5% home mortgage rate loan with two points, or a 5.75% rate with zero points. Since one point is equal to 1% of the entire loan amount, the lower rate of 5.5% will save you nearly $1,150 dollars, but will cost you $6,000 in upfront costs. Refinancing at the higher rate of 5.75% only saves you $575 dollars each year, but by virtue of taking the higher rate, you didn't have to pay the $6,000 in points. In this example, if you are planning on staying in the house for more than five years, the lower home mortgage rate with the two points puts you ahead in the long run.

It's the dream of many Americans to be able to afford a home. Bad credit is a problem for many out there, but it shouldn't prevent you from reaching your goal of becoming a homeowner. Today can be the first day you start to use your credit wisely. Just develop a credit plan that works for your budgetary needs, and stick to it.

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