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How to get a Home Loan if You Have Bad Credit


For those who have been behind on their payments, defaulted on debt, or have taken more debt than they should, homeownership might sound like a far-fetched idea. However, many debtors think that they have worse credit scores than they actually have and should check their credit scores to verify this.

apply bad credit loan

What is Bad Credit Home Loans?

It is a form of financing extended to those applicants who don’t have adequate credit ratings. Thus, no matter what your credit record is, owning a property with the help of a loan won’t be impossible for you. Nonetheless, it won’t be a smooth affair and you’ll be charged a higher rate of interest than on traditional credits.

Further, there are also dangerous alternatives out there that target such a clientele. At first, they seem ideal as they readily provide you with the cash you need, but the various penalties along with the myriad of fees they carry will leave a larger hole in your pocket than you’ll probably like to handle.

So you should always research well for the type of plan that best benefits you. Apart from that, you can also use the following tips which will help you when shopping for such a kind of financing.

If the credit score really is poor, debtors will of course want to get their finances cleaned up before they buy a home. Homeownership is the largest financial commitment that most people make and it is not a good idea to make this commitment with mounting debt. Pay off credit cards and eliminate as many monthly payments as possible.

Three factors determine whether a lender will give a loan to a home buyer:

  • A good credit score
  • A large down payment
  • A low debt-to-income ratio

For debtors who have a bad credit score, improving on the other two factors will increase the chances that the debtor will get home loans for people with bad credit. This means that the debtor will want to make the largest down payment possible and will also want to pay off other forms of debt.

Larger Down payments

Since this kind of credit is giving to those with bad credit, hence the lender remains at risk until the amount is repaid in full. There is no guarantee that the borrower will be able to pay back the amount within time and/or in full. This leads the lender to hike up her/his own losses. But the higher interest will leave the lender worse off. So what can you do to mitigate this problem?

Well, you can put down a larger amount as a down payment. This works as the assurance which had been missing in the previous case. Here the risk shifts from the lender onto you, the borrower. Thus, as the risk becomes shared the rate of interest charged also becomes considerably lower adding to your relief.

Get Better Employment

Debtors who have better employment than they had in the past should consider making a larger down payment to reassure the lender that they can afford the house. Larger down payments make the loan a smaller financial commitment for lenders. Also, larger down payments lower the debtor’s monthly payment in the long-run.

Down payments are excellent because the portion of the money that serves as the down payment is interest-free. For example, if a home buyer were to make a $0 down payment, they would have to pay for the cost of the home plus interest. However, if a debtor pays $50,000, that portion would have no interest attached to it.

Having low monthly payments is crucial because lenders will charge higher interest rates for borrowers who have bad credit. Lowering the monthly payments will make high interest rates less overwhelming.

Find a Co-Signer

If there is someone who trusts you, such as a spouse or parent, having a co-signer can make it easier to obtain a loan for a house, especially if the co-signer has a good credit score. However, this can also put the co-signer in a bad position, since they will have their credit score adversely affected if the monthly payments are not made on time.

Since borrowers with bad credit are often low on money, some lenders will offer adjustable-rate mortgages that will make the loan sound much more attractive. However, these adjustable-rate mortgages become much more expensive when the payment amount increases as a result of an increase in the national mortgage rate. Unless the debtor anticipates having a large increase in income, adjustable-rate mortgages are too risky.

Avoid Subprime Mortgages

Subprime mortgages can be very dangerous for borrowers because they often have prepayment penalties and balloon payments that can be difficult for borrowers who have a limited income.

Look for ‘Guaranteed Loans’

For anyone who is very worried about finding loans, the good news is that guaranteed loans exist to offer you funding even when no one else will touch you with a barge pole. These companies make their money by offering loans where others won’t thereby guaranteeing themselves a market, but of course, the downside is that they will charge a lot more than other companies to cover themselves against the risk. Thus it’s worth seeing if you can’t get your loan elsewhere first, and it’s also worth looking at ways you can lower the rate by making yourself a little less of a risk.

Secure Your Loans

A secure loan is a loan that has your property as collateral. In other words, if you turn out not to be able to pay off the loan, you have agreed that the lenders can seize your property to raise the capital. This then means the company is guaranteed to get their money back so they can charge you less interest. However, at the same time, it also means there’s more of a risk for you – because you could potentially lose your home.

Ask for Less

If you ask for less money, then you will, of course, be more likely to get the loan and there will, of course, be less of a risk for the companies giving you the capital. Obviously, you will be asking for the amount you are for a reason, but you might be able to raise some of the cash you need in other ways – consider asking relatives for money or seeing if you can’t sell off some of your belongings.

Change Your Repayment Scheme

Your repayment scheme outlines how and when you are going to pay the money back. Interest accrues over time, of course, so the faster you can pay the amount back the less you’ll have to pay in total.

Improve Your Credit Rating

Of course, you can also aim to simply improve your credit rating so that you can demonstrate your ability to pay back your debts. There are many ways you can accomplish this – for instance by taking out a credit card and making sure to always be prompt with your repayments. Obviously, this takes time though, so if you need the money fast it may not be a viable option.

 Present Your Best Case

When you go to the bank to get a loan you must present the best case possible. Show your savings or any collateral that you have. For example, if you have a retirement savings account or have equity in a house, all this can help you get approved for a loan. Also, a steady employment history helps convince banks to make loans. If you have gotten raises in your pay at work over the years this is also valuable information for potential lenders.

Consider Credit Unions

Credit unions are lending institutions where all the members are involved in the same industry or live in the same geographic area. They make loans to individuals, and credit unions are more flexible than banking institutions. Credit unions are more likely to listen to individual circumstances increasing your chances for approval.

Friends and Family

Never exclude the possibility of friends and contacts in asking for a loan. This might be uncomfortable, but it does not have to be. First of all, like with the banks, present your best case. Also, put it in writing. Be prepared to write up a loan contract with interest rates and payment terms outlined in as much detail as possible. This will show the potential lender that you are serious about repayment.

Peer to Peer Lending

There are websites like www.prosper.com that connect individual lenders with borrowers. You upload your request, and it becomes visible to thousands of potential lenders. If they like what they see they contact you to grant you a loan. Many times interest rates on peer-to-peer lending sites are better than what banks will offer.

Even in today’s tight lending market, there are ways to get a loan despite the bad credit. It requires some hard work, ingenuity, and courage. But it is possible to get a loan even with bad credit. Also if one option fails don’t get discouraged. Pick yourself up and try again. Try another option or another institution. The worst they can do is say no. If you keep trying though you will eventually get the loan you need.

Four Tools To Turn Bad Credit Into Home Ownership

The aftermath of the recent financial crisis has put an extraordinary amount of homes on the market at incredible discounts. However, too many consumers cannot take advantage of these prices because of poor credit scores. Take advantage of the free resources listed below to improve your credit score and move into your dream home!

AnnualCreditReport.com

Before you can begin to work on improving anything, it is crucial to understand your current position. The United States Fair Credit Reporting Act (FCRA) has made this easy by requiring each of the three major credit reporting agencies to provide consumers with a free copy of their credit report once per year.

AnnualCreditReport.com is the only source for these free reports and the ideal starting point for improving your credit. The report will clearly identify items that increase and decrease your credit score, allowing you to plan for improvement.

Mint.com

You now know that you need to improve your credit, but how is that possible with so many bills, bank accounts, credit cards, and loans? Mint.com is an excellent, free tool for consolidating all of your financial activity. It allows you to see all of your incoming and outgoing payments conveniently, in browser or application format.

The service also monitors your transactions to track spending by categories including loans, utilities, restaurants, and user-created categories. Categorizing transactions makes it easy to set specific budgets and monitor spending. It will even alert you to unusual spending to remind you of your goals, or to alert you of potential fraud.

Leverage these capabilities to identify savings opportunities that can be used for a down payment. Setting a reasonable budget for savings will give you something to work toward and show you how quickly you can achieve your goals.

Zillow.com

Zillow is a great real estate tool that provides data on millions of residential and commercial properties in the United States. Find your dream home by searching based on location, price, size, and more. The service allows you to see foreclosures, new construction, and everything in between.

The site also provides a wealth of information to leverage in analyzing your purchase, including recent sales, market trends, estimated mortgage payments, and more. The service also allows you to track homes you are interested in and can alert you via notification in the mobile application or through email.

MortgageLoan.com

The final, and most exciting, part of your journey to homeownership is being approved for the mortgage that enables you to buy that dream home. Mortgageloan.com is a great, online resource that provides mortgage information, calculators, and rate comparisons.

Search through the consumer guides to find useful information regarding discounts for select groups of borrowers such as veterans and seniors. Target your home search based on target states or areas with the lowest mortgage rates.

Input property value, credit score, and down payment to calculate a reasonable interest rate and make sure you get the lowest possible rate. Regardless of your financing needs, MortgageLoan.com is a quick and easy way to gather valuable information.

Knowledge is power, especially in markets as volatile and competitive as the real estate and credit markets. Acquire as much knowledge as possible using these valuable tools to understand and improve your credit and the purchase best home available.

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