How Does Having Bad Credit Affect Shopping for a Home Loan?

By Gina Pogol
Mortgage Credit Problems Columnist

Lori Asks: Dear Gina, My credit has taken some knocks since the last time I bought a home. What do I need to know about shopping for a home loan with bad credit?

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Gina Says:

Dear Lori,

Currently over 25% of consumers, which is about 43.4 million people, have a credit score of 599 or below. So you're not alone. And you are correct; lenders won't exactly be beating down your door to offer you a mortgage. If you want to get home loans with bad credit, your search process involves more than opening up the newspaper and picking the bank with the lowest advertised rate. That rate is not available if you have bad credit.

First, get your credit report and credit scores. You can get a free copy of your credit report and you can purchase a copy of your credit scores from www.annualcreditreport.com. You don't even know how bad (or not-bad) your credit is until you get the report and see your scores. If you're at 620 or higher, you have a decent chance of getting an FHA mortgage, and if you have 20% to put down, you might even qualify for a grade A loan if you pay a higher rate.

Second, complete the form on this site. You don't have to provide any personal identifying information, and it's a fast and easy way to determine who is willing to offer you what terms.

Remember: you are not your credit rating. Don't think you have to crawl or feel uncomfortable because you've had a hard time financially. Don't put a bag on your head when you meet with a bad credit mortgage lender; the economy has been hard on many people and loan officers know it better than most.

But be realistic. Don't expect a top-grade interest rate;bad credit lenders willing to take extra risk have to earn more to make up for their higher costs.

What if you can't get a prime, FHA, or bad credit mortgage?

Find out what you need to do to qualify. Your lender owes you more than just a decline letter and a thank you. Find out what you need to change and make a plan to get approved down the road.

Look at hard money. If you find a house that you must have, or a fantastic investment that looks like it could pay off hugely, it may be worth going to a hard money lender. Understand that these folks want several points up front and charge a high interest rate. In addition, you need a very large down payment. Know also that many hard money lenders are private citizens and you won't have the same consumer protections that you do with a licensed bad credit mortgage lender.

Try for seller financing. A motivated seller may be willing to lend to you if you can convince him or her that you're a good risk. That probably means providing a satisfactory explanation for your credit problems and making a hefty down payment. Have a real estate attorney look over your agreement--again, you won't have the same protections when dealing with a private seller, so it's up to you to protect yourself.



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