My Bad Credit Means I Have to Pay Extra Fees. Does This Have to Be Done Upfront?

By Gina Pogol
Mortgage Credit Problems Columnist

Holly Asks: Dear Gina, I ruined my credit a few years ago and while my scores are good enough to get me approved, the lender is adding on thousands of dollars in extra fees because of my credit score, which is about 630. Do I have to bring the fees in when I close on my loan?

Gina Says:

Dear Holly,

Thanks for writing. And congratulations on getting your mortgage approved. Today 630 is considered a bad credit score in the wake of the mortgage lending crisis, but in the past it was considered an okay score. Keep managing your debt and your score will continue to improve.

Bad Credit Surcharges Imposed by Some Lenders

Now, about those add-ons: conventional lenders today, who sell their loans through Fannie Mae or Freddie Mac, have a complicated matrix that they use to determine how risky they think you are as a borrower and they charge accordingly. Add-ons of up to 5 points (5% of the loan amount) are not unheard of for those with higher loan-to-value ratios, lower credit scores, who want cash out, or are trying to finance a manufactured home or condo.

Think FHA for Bad Credit First

My first choice would be to look into an FHA loan; if your credit was good enough for a conventional lender it's good enough for FHA. There would be no surcharges for your credit and the other conditions Fannie Mae dings you for.

Other Options for Those with Bad Credit and High Closing Costs

Assuming that the loan amount exceeds FHA's limits or that you have some other reason for not being able to go there, these are your choices:

1. Bring the closing costs to the table.

2. Have the lender increase your interest rate and use the added profit to cover your closing costs.

3. If refinancing, roll the closing costs into the refinance if you have enough equity to do so.

4. If purchasing, ask the seller to pay the costs.

So you do have some choices, depending on whether you are refinancing or buying, your available down payment, and if you qualify at a higher rate needed to get a "no-cost" loan. Good luck. And when your credit is perfect and you have some equity, keep an eye on mortgage interest rates. There may well be a chance to refinance in the future into a much better deal. Good luck!

About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.

All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.

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