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There are ways for consumers
with poor credit to secure a mortgage for the purchase of a
home.
If your credit score falls below 630, you have
relatively poor credit. Your credit score is a number between 300
and 580 that ranks the risk you pose of defaulting on a loan. The
higher your score, the less likely you will default. The lower your
score, the more risk you are as a borrower.
When you have excellent credit, you are able to
receive advertised interest rates, great repayment terms and have
little trouble applying for credit. The lower your score, the higher
your interest rate and the more questions you wil have to
answer.
If you are looking for good rates, you have to
have a credit score above 680. The average consumer can find fairly
decent rates all the way down to 630. Beyond that, you may have to
look a little harder for financing.
According to Fair, Isaac & Co., the company
that created credit scores, 13% of consumers have a FICO score under
599. These consumers become sub-prime borrowers, which means that
basically they will receive rates below the prime.
What do you do if you find that you are in this bottom
13%?
First, you will simply have to accept that you will pay more or
go without. In order to obtain a mortgage or other loan, you will
have to pay more than other borrowers do. This is because the lender
sees you as a risk. They don't want to lend money that won't be
repaid.
Sub-prime lenders will consider more than just your credit score.
If you can show that you have turned your credit usage around, you
may be able to have your application approved. For example, a lender
may accept an applicant with a credit score of 580, if their credit
report shows that they have paid all of their bills on time for the
last 18 months.
Make sure that you will be able to pay back the money you want to
borrow for a home. Most sub-prime lenders offer only adjustable-rate
mortgages. These mortgages feature lower interest rates at first
than do fixed-mortgages. But the rates can go up over time. Make
sure that you can pay the mortgage if it was to hit a peak level.
You don't want to pay for years and years only to lose the home
because interest rates increase.
You can find sub-prime mortgages with little down. However, you
can often receive a lower interest rate for more of a down payment.
You might even consider paying points to lower your interest
rate.
You can expect to pay an interest rate well above the advertised
rate for a 30-year fixed-rate mortgage. Talk with several lenders to
compare their rates and terms. If one offers you a much lower
interest rate, be cautious. Read the fine print carefully on each
document you are given.
While you may pay higher interest rates now, that doesn't mean
you will always have to. There is nothing that says you can't
refinance in five years once your credit score improves.
There are mortgage options out there for borrowers with
less-than-perfect credit. You just have to look for them.
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