What to Do If You Have Bad Credit and How to Fix It Explained Complete Guide to Bad Credit Mortgages
The long and short is that the conventional approach is your best bet for securing a solid loan with a reasonable rate and little hassle. You’ll need a high FICO score and a good credit history to qualify. You have just described what is known as a prime loan. If your credit score is below that, you may be in a “sub-prime” position and need to go elsewhere for financing. These will have more demanding prepayment and payment policies and higher interest rates to compensate for the borrowing. Your balloon payment, too, will be far higher than it would have been if you’d taken the conventional method.
Here’s hoping you can further on the matter.
Credit score 101: An Introduction
The government created the FICO system in the early 1950s. Still, it wasn’t widely used until recently because of widespread loan defaults at banks and government-based lending institutions (mainly due to their laxity in accepting applicants). Today, if you want a loan from a government agency, your credit history and current account must first pass muster. Your FICO score is a numerical representation of this calculation.
Your FICO score is shared with the three major credit reporting agencies: Experian, Equifax, and TransUnion. Scales can go from 300 to 900. The higher your credit score, the more likely you will be approved for a mortgage (or any other type of loan), as the lender will have greater confidence in your capacity to repay the debt.
These factors influence final grades:
Inability to pay
Current debt load
Credit Account Varieties
Length of Credit Record
Credit report inquiries
Prior Credit Application Activity
Inappropriate credit conduct, such as bounced checks
Lenders tend to favor borrowers with credit scores of 650 and up. Your chances of securing a loan will plummet if it is lower than that. Credit scores between 620 and 650 warrant further investigation (lenders may question, “Is there trouble ahead?”). When credit ratings are below 620, lenders become extra cautious. Expect more roadblocks, a more extended procedure, and the possibility of being rejected in the end. However, if your score is above the 650 level, you will have a far better chance of getting a high-quality loan with a low-interest rate. That’s the spot you’re aiming for.
Strategies for a better credit rating
The following are some easy methods to raise your credit rating:
Be prompt in making mortgage and rent payments in particular. Laziness is the primary cause of people falling behind (credit jargon for “missing payments”). Make a point of paying your bills on time by staging a historic rally. This will have a positive effect on your credit rating. For instance, a person with a credit score of 707 can increase their score by 20 points by paying all of their bills on time for one month, just like that.
Reduce your credit card debt by keeping your balances low. An individual’s credit score can drop as much as 70 points due to excessive credit card debt.
Use your credit card wisely – Don’t ask for advance payment! Fewer is better, if possible. When new accounts are created, the account age decreases, and, in turn, the account’s credit score drops.
Credit cards are helpful, but you should learn to use and handle them responsibly. Paying on time shows lenders that they can trust you as a borrower. Credit card accounts always paid on time lend credence to that idea. If used responsibly, credit cards can be more convenient than cash.
Keep an eye on your accounts; dormant closed accounts can reappear anytime. They affect your credit rating as well.
Potential borrowers of subprime loans
Sometimes a borrower has no choice but to look elsewhere due to their poor credit score and history. When any of the following occur, you’ll likely need to look elsewhere for what you need:
As of right now, your credit rating is below 620.
Two mortgage payments have been over a month late within the past 12 months.
There was one mortgage that was 60 days past due last year.
There was a foreclosure on your record within the previous two years.
In the past two years, you’ve gone bankrupt.
More than half of your salary goes toward paying off debt.
In a month, you could not pay for the bare necessities.
Still, the best way to find out if this is the case is to speak with a broker or other expert in the field of mortgage loans. Even if you have missed a few credit card payments in the past, your interest rate might not immediately skyrocket to double digits.
If conventional lenders deny you, other, more creative options exist. Some examples are as follows:
Private lenders provide hard money loans and are not contingent upon the borrower’s credit history or ability to repay the loan. Keep an eye out for ratings with a low value-to-ratio, which indicate that the money you receive is likely inadequate for your home’s worth.
FHA Loans (from the Federal Housing Administration) – You may buy a house with as little as a 3% down payment and a credit score 580 if you meet the lenient underwriting conditions. Veterans should think about applying for VA benefits.
So-called “liar loans” are another name for stated-income loans. Those who work for themselves will find these useful. The lender places faith in your income statement. These loans have a bad connotation because the borrower lies about their income.
The 2-year teaser rate on the 28-year adjustable-rate mortgage (ARM) is more realistic.
These choices are great because they assist individuals with credit ratings below the 620 threshold.
Borrowers, on the other hand, bear the costs of such loans because their interest rates and monthly payments are extremely high (sometimes twice as high as those of conventional loans). Many of these loans contain significant rate hikes after the first two years when the buyer is expected to have refinanced. However, the borrower may lose both money and ownership of the home if the mortgage market tightens or the home buyer cannot climb out of his credit issues. If you decide to go this way, be aware that your payments will increase over time and that a large balloon payment will be due at the end. Possible best-case scenario: this negative credit mortgage option…
Yanni Raz is a Los Angeles, California expert in hard money lending and trust deed investing. To help aspiring real estate investors, Yanni writes informative blogs on the topic. “Read my articles before putting your money into any deal.”