For many individuals with poor credit home ownership feels out of reach. This is simply not true; people with bad credit can still qualify for competitive mortgage rates, you just need to know how to do it.
If you are a homebuyer with poor credit you may need to secure your mortgage from a specialized mortgage lender called a “Sub-prime” mortgage lender. Your credit score determines what type of mortgage you will qualify for. Credit scores range from 300 to 900. You will often hear credit scores called FICO scores after the company that calculates them. An average credit score falls in the range of 620 to 700.
If your credit score is less than 620 you are considered by lenders to have poor credit. Most traditional mortgage lenders do not cater to individuals with credit scores this low; you will need to find a sub prime mortgage lender for your mortgage. The interest rate you will qualify for with this loan is higher than a traditional mortgage loan. Because lenders consider you a high risk borrower this risk is passed on to you in the form of higher interest payments.
The terms you receive on a sub prime mortgage are often less than favorable. Sub prime lenders often require prepayment penalties and a large amount of prepaid interest paid upfront. Your loan contract may also require a balloon payment at some future date. Why would you agree to a mortgage like this? Your goal for this loan is to rebuild your credit. After two years of on-time mortgage payments you should qualify to refinance the mortgage with a traditional mortgage lender.
During the two year period you need to focus on cleaning up your credit. Pay down the balances on your credit cards and above all else make your payments on time. Home buyers with poor credit will have to pay quite a bit more for their financing; however, if you do your homework and research mortgage lenders prior to applying you can save yourself quite a bit of money.
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