Posts tagged: how to get a home loan with bad credit

How to Get a Home Loan with Bad Credit


Here’s the scenario: you’ve messed up your credit. A couple years back, after an on the job injury, you couldn’t work for six months and things piled up on you fast. Before you knew it you’d had a car repossessed, you missed three mortgage payments, and just like that your credit was basically trashed. In a stroke of luck, you were able to sell the house to avoid further missed payments, but you were stuck with the bad credit score. Now that some time has passed and you’re working steadily again, you’re ready to buy a new home.

The question is how to get a home loan with bad credit. Well, I have some good news and I have some bad news. The good news is that home loans with bad credit absolutely do exist. The bad news is that you, as a ‘credit-challenged’ borrower are going to have an entirely different application and qualification process than people with unblemished credit. You are likely to be able to buy a house again, but it’s going to take some patience and work.

As usual, you need to go through your own preparation process before ever going to talk to a mortgage broker or bank representative. Before you walk through their office door you need to already be clear on a) your credit grade (A through D), your FICO score, the LTV (loan to value ratio) of the home you’re trying to buy, and your real affordability range. As a person with credit that’s already somewhat damaged you really have no business pushing the envelope at all when it comes to your ability to stay way ahead of your payments.

Once you’re clear on the fact that you have everything in place that you possibly can in terms of your own self prequalification process, it’s time to go to the lender and see what your options are.

The biggest way you’re going to feel your bad credit score is in the fees and the interest rates you’ll be charged on your mortgage. Usually, the loan origination fees paid during the mortgage application process are called ‘points,’ and a prospective borrower can pay anywhere from one to five points as an origination fee. People with great credit very often pay zero points, while those that are trying to get a home loan with bad credit often pay up to four or five. That can get very expensive if you think about the fact that a single point on a $200,000 mortgage is $2,000.

I realize you’ll be very frustrated having to pay such steep fees thanks to your poor credit score, but there’s a certain courtesy you should extend to the loan originator working on your mortgage. It won’t do you any good to make ridiculous demands as far as lowering fees or interest rates. You have to keep in mind that anyone working on your loan will be paid completely on commission, and if you turn into a big headache they’re going to cut you loose and go work with a client that is a lot less hassle for the money. Get the best terms you can, but don’t alienate the people working to help you out.

If you’re persistent and you do your homework, you’ll able to land the home loan you want. After a few years of on-time payments you’re likely to see your credit score jump way up, and you’ll be able to investigate a refinance that will make your interest rate much more attractive.