By Richard Barrington
A Poor Credit Mortgage Shopper's To-Do List: Ten Ways to Prepare
Mortgage Credit Problems Columnist
People buying a home tend to focus primarily on the effort involved in finding and evaluating properties. However, the process of obtaining a mortgage is also quite complex, and since you will probably be paying back that mortgage for the next 15 to 30 years, it's definitely something you want to get right. A little advance preparation can help--here are ten things to do before getting a mortgage.
- Know your credit score. This will have a profound affect on your ability to get a mortgage, and on the interest rate you pay. Bad credit mortgages were fairly common during the housing boom, but following the subsequent mortgage crisis, home loans for people with bad credit became very hard to find. This kind of thing tends to go in cycles, and you may be able to get a bad credit mortgage again in the future, but in any case, knowing your credit score will give you an idea of what you are dealing with going into the process.
- Look for ways to improve any history of bad credit. Lenders will be more receptive, and the rates they offer will be cheaper, if you can clear up any credit problems before you start shopping for a mortgage.
- Test your budget. Rates for credit cards and mortgage loans are more expensive for those with bad credit, so even if your credit is currently good you'll want to make sure you don't run into trouble once you have to start making monthly payments. Work out a budget that tells you how much you could comfortably pay on a mortgage every month, and spend a few months actually setting that amount of money aside. This will not only show you whether or not your budget is realistic, but it is also a good way to build up a down payment.
- Research your eligibility for special programs like FHA or VA mortgages. If you have serious credit problems you might not be able to get these types of mortgage loans, but for a moderate amount of (not recent) bad credit they may be just the answer. By providing mortgage insurance, organizations like the FHA and the VA make lenders more willing to make loans.
- Familiarize yourself with different mortgage types. You need to know the basics, such as the difference between fixed and adjustable rate mortgages, and what effect different repayment periods will have on your payments. Unless you have a detailed understanding of mortgages, do yourself a favor and don't stray from a standard, fixed-rate mortgage.
- Check current interest rates. Don't just look at market averages, but take into account any relevant factors, such as good or bad credit, refinancing or original purchase loan, fixed or adjustable rates, etc.
- Determine your target price. Once you know your budget, what type of loan you want, and what interest rate will apply, you can use a mortgage calculator to see how big a loan you can afford. Your target price should equal this amount (or less). And don't forget to consider your down payment and closing costs--you have to come up with that money somewhere.
- Compare lenders. Shop around and use Internet resources to find the best rates. Be sure to make apples-to-apples comparisons of identical loan types and terms, and factor in all fees.
- Determine your refinancing goals. If you think you might want to refinance, the first step is to decide what you want to accomplish. It might be to lower your interest rate, to reduce your monthly payment by repaying the remaining balance over a longer period, or to access some of your home equity. You could also head off developing a bad credit history if you refinance to consolidate more expensive forms of debt. In any case, knowing your goals will help you choose the type of loan best suited to your needs.
- Target a refinancing rate. To do this, you would start with your current mortgage rate, and then figure out how much lower a refinance rate would have to be to save you money, even after accounting for all the fees and expenses involved in getting a new loan. Remember, bad credit also makes mortgage refinancing more expensive, so if your credit history has deteriorated, it will be tougher to make refinancing work. On the other hand, if you've cleared up some past credit problems, refinancing might be a way to capitalize on this by capturing a lower rate.
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A little advance preparation will help you shop more successfully for a mortgage -- especially if that preparation includes clearing up bad credit.