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Bad Credit Mortgage Loans: Upgrade from a Sub-Prime Mortgage

By Karen Lawson
Mortgage Credit Problems Columnist

Bad credit mortgage loans provide opportunities for people with bad credit to get into a home, but they can cost extra in terms of higher interest rates, additional finance charges, and sharply rising payments. Here are some tips for preparing to refinance out of a bad credit loan to a mortgage with more favorable terms.

From Bad Credit Mortgage to Lower Cost Mortgage

The first step toward a less costly mortgage is to know your current credit score. Typically, scores of 620 and above qualify for traditional mortgage loans, although this may vary depending on individual financial circumstances. You can order a free credit report from each of the three major credit bureaus (Experian, Transunion, and Equifax) annually.

If your credit score falls below 620 you will probably have more difficulty refinancing; however, underwriters are more likely to help if you can show that you've cleaned up your act. A continuing pattern of late payments or charge-offs won't help. Remember, there is no "instant fix" for bad credit. Don't be tempted by ads claiming to "erase bad credit" immediately. Here are some tips for improving your credit score:

Reduce consumer debt: Make a list of all debts. You'll want to note each account name, credit limit, the balance owed, the amount of your monthly payment, and the interest rate for each account. A great way to improve your credit rating is to pay down balances to less than 30% of the total credit line. For a credit limit of $1000, the balance owed should be no more than $300. It's also a good idea to credit lines to five or less. Don't open any new credit lines.

Raise extra funds to pay debts: In order to get out of a bad credit loan you may need to consider new ways of reducing debt. Garage sales, online auctions, additional part time jobs, and reducing spending can provide extra funds for paying bills. Paying down credit cards can help save money when refinancing bad credit mortgage loans.

Review Spending Priorities: In order to pay down your debt, you'll need to stop using credit cards. Leave credit cards at home when you shop. Paying cash can make you think again before making non essential purchases. When budgeting, make sure to allow for increasing household expenses such as food and fuel. You may have to put off a vacation or stay away from the mall, but improving bad credit can help you get a more affordable home loan.

Source:
Annual Credit Report Website

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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