Posts tagged: home loans poor credit

Home Loans with Poor Credit

Recently I was talking with a friend who’s living with his parents right now, along with his wife and three kids. He’s 34, and he ended up living with his parents after going through a rough patch with his employment and missing some payments on his other debts. His wife’s credit went in the tank too, because her name was on the loans with the missed payments. It’s a bit of a mess, but a couple of years have passed since he went through all that, and he and his wife are looking to buy a new home now. Obviously they’re going to have to look into home loans with poor credit.

What people don’t realize is that getting a poor credit home loan isn’t a completely impersonal process. Yes, lenders have to consider your credit score as part of the qualification process, but that doesn’t mean they have to completely neglect the human element. The first and biggest piece of advice I’d give a  credit challenged home loan applicant is to contact every bank and credit union in your city or county.  Local lenders are much more likely to actually sit with you and have a sincere conversation about the factors in your application that don’t show up in a credit score.

You really want to explain to them, being completely truthful, what circumstances led to your bad credit status. Think of this like a job interview, and imagine you’re telling your new prospective boss why you got fired from your last job. It’s actually a very similar situation. One thing you don’t want to do is lie or make excuses. You’re trying to make it clear that the past is the past, and although you’re responsible for what happened, you’re never going to let it happen again. Make sure you can paint a very clear picture about what’s different in your circumstances now compared to when you wrecked your credit. They’ll appreciate a sincere explanation much more than a laundry list of hard luck excuses and stories about how “it’s not your fault.”

The next best piece of advice I can give isn’t something you can complete in a day, a week, a month, or probably even a year. You need to a) minimize your personal debt, b) increase your income, and c) save up a nice down payment. Remember, you’re trying dealing with home loans for people with poor credit. Nothing strengthens the message that you’ve changed more than being able to show them a credit report that, although it shows  a low score, doesn’t show any consumer debts on it.

There’s a psychological benefit as well as a tangible benefit to having almost no other debt when you’re trying to get your home loan. The tangible benefit is that your debt to income ratios will look great (especially if you followed the advice about finding ways to increase your income). The psychological benefit is that the underwriter will be able to look at your report and say “this person has obviously made some big changes in his/her personal finances.”

If you make the effort to go through these steps I feel confident you’ll be able to qualify for the home loan you want and need sometime in the next year or two.

Poor Credit Home Loans

Unless you live in a cave you know that the whole home buying game has changed completely. Gone are the days where anyone with a pulse can borrow almost any amount to buy a home with no real scrutiny of their ability to repay that loan. And thank goodness. I think we’ve all seen that such loose lending practices put us all in a tough situation in America. A return to to conservative lending practices may not be as fun in the short term, but it keeps us all healthier in the long term.

But is the dream of home ownership dead for people whose credit has been damaged? Actually, no. Poor credit home loans still exist, and they always will. But if you have bad credit and you’re determined to buy a home, be prepared to run the gauntlet with the banks before you sign the closing documents and receive the keys.

I believe the home loan qualification process will take on a much more personal feel again. I can see more and more situations where prospective borrowers go to their local bank or credit union and go through a relatively extensive interview process with mutliple loan officers. After all, on paper these bad credit borrowers don’t look good. So if they’re going to get a home loan for poor credit it’s going to be because they can convince a lender that their past is not a reflection of their commitment to being healthy borrowers going forward.

Here are a few things you can do if you really want to qualify for a home loan for people with poor credit:

Show the bank you’re taking obvious and meaningful steps toward improving your credit worthiness as well protecting your ability to make your mortgage payment on time, every time. For example, have you sold off some of your debt? Have you unloaded that expensive SUV and traded it in for a smaller, more economical car? Getting rid of your expensive cars will not only improve your debt to income ratio, it will show the lender that you’re committed to making your mortgage payment a high priority. The same would be true for credit card balances. If you have consumer debt on things like furniture and electronics, sell them off as fast as you can. You want to show the bank that you can make sacrifices in order to have a home.

Be patient. Unfortuntely, going into debt and ruining your credit take very little time compared to what it takes to get out of debt and improve your credit. Are you willing to follow a path of discipline and sacrifice for the next two or three years (or even five years) so you can own the home you’ve dreamt of? I hope you can see a day in your future when poor credit home loans aren’t even a consideration for you.