Imagine this. You see that beautiful home while driving past the marina. Your heart asks you to get out of the car, pay a visit to the seller and buy the house immediately. But then you realize that your wallet is not as fat as you would expect It to be. This results in you applying for a mortgage loan on the property. Now the first question to hit your mind will be about your credit history. You must be asking yourself whether the lender will grant mortgage, keeping in mind your bad credit history. When was the last time you checked your credit history? Oh you checked on Credit Karma, well that won't really help. In general you should check your FICO score 6 months in advance of shopping around for a mortgage.
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Credit history is a record of your past credit details. It also includes your non payment of debt and credit arrears. Many people, who have previously defaulted in payment of bills, have a bad credit history. Generally, lenders are not very keen on favoring borrowers with bad credit history. Also, lenders are very strict in not offering mortgages to people who have been bankrupt before. Generally lenders will use your FICO score which is not the score you will receive on those free credit reporting apps. It get more complicated because each lender decides it credit requirements and threshold of Credit Score.
But there are some lenders who offer mortgages for people with bad credit history. This is known as a sub-prime mortgage. Bad credit loans may seem very enticing. The interest rates associated with sub-prime mortgages are very high compared to other mortgages. While going for a subprime mortgage loan, ensure that interest rates are not too high or else they will worsen your credit condition and that is the last thing that you want. Subprime mortgage rates can range from around 7% to 13% and therefore it is absolutely important that you are under the least obtainable interest rates. So ensure that you do your homework before approaching the broker.
Due to bad credit history, lenders demand a higher down payment before procurement of the mortgage. If you are able to afford this down payment, then the monthly interest rates will be lowered, thus improving your credit history. The best way for you to obtain your subprime mortgage loan is through a mortgage broker. A broker will guide you through all the formalities that have to be completed. But there are some downsides to subprime loans as well.
Interest rates generally tend to increase as the year progresses. This proves to be a real problem for those who are just able to manage the current interest rates. An increase in rates can result in disaster, and if a large number of borrowers end up in such a position, a crunch situation is created and affordability related problems are brought out onto the forefront. Also prepayment penalties will keep you stuck to the loan for a longer time than necessary. You have to negotiate in order to obtain the least possible penalty.
The final verdict is that it may be wiser to spend 6 months prior to purchasing a home and fix any errors and build up your savings before approaching a mortgage broker.
You can also sign up for the Home Buyer 101 Program with Credit Agent Plus and we will work with your mortgage broker to ensure you understand your options every step of the way to home ownership.
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