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Buying a Home with Bad Credit

May 29, 2008  |  Difficulty: Easy

Path to mortage
Buying a home with bad credit is not an easy task, but there is hope.

If you have bad credit, you certainly aren’t the only one. It has been reported that most individuals in the United States have an average of $8,000 in debt. And in recent years bankruptcy rates have increased.

The horrible thing about bankruptcy is that it remains on your credit report for at least 10 years, and this can make your credit rating very low. If at all possible, avoid bankruptcy. Seek the help of a credit-counseling agency. Find an agency that is reputable and has the best programs for your current situation.

Despite all of this, you still want your house. How can you do this?

First, know your credit score. This is the first thing that a lender wants to know about you. This score allows the lender to know your credit ranking. You can get a copy of your credit report around the price of $35. The credit report is also known as a FICO score. A company by the name of Fair Isaacs made the concept of the FICO score. This score has become very popular, and over 70% of mortgage lenders use it.  

If you receive your FICO score and see that it is 720 or higher, you are in great standing. You will be able to apply with some of the best loan companies and will receive the best interest rates. A great interest rate will save you thousands of dollars over time.

Let’s review how credit scores work.

A score of 720 and higher will allow you to get a loan with the best interest rates. Scores around 700 will allow you to get a decent loan with an interest rate that is a percent higher than the ideal rates. Credit scores at about 680 will get you qualified for a loan that may not give you the rates you would like.

How does this translate to you? Well, let’s say that you have a loan that is $200,000. But you have a lower rating that qualifies you for an interest rate that is a percent higher than the ideal rate. This means you will be paying at least $100 more each month. The end result is that you are paying $28,000 more over the course of a 30-year loan. What a drastic blow to your pockets!

If you noticed the trend, interest rates only get higher as your credit score goes down, but don’t start panicking just yet.

The good part is coming. Interest rates have been very low in recent years. Those who have poor credit are still getting rates that are good, compared to past interest rates. If you are applying for a mortgage it is likely that you will get a rate that is 8 percent or lower.

But if you don’t have excellent credit, it is probable that you don’t have too much money for a down payment. You may need full financing to purchase your home. To cover this cost, you might have to seek a secondary mortgage.

It is typical for a second mortgage to have a higher interest rate than your primary mortgage. An interest rate on a secondary mortgage for a person with poor credit could be 10 percent or higher. This makes your borrowing cost very high.

The question is, can you really afford these steep payments. Even if you can afford it, is it the right choice? It’s all based on whether or not the property is a great investment. But keep in mind that you will need to be able to handle the payments even if a financial emergency arises. This could be a tragic situation.

It is all your choice. But you might want to consider waiting. If you wait 2-3 years you could take steps to give your credit rating the overhaul it needs. This allows you to gain better interest rates and save a little cash for the down payment. You can save yourself a lot of money and time by practicing a little patience. Before making a final decision it is best for you to seek the advice of a credit counselor or advisor. A professional can give you the needed advice, and can put you on the road to a positive financial future.

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