Historically, you needed to have fairly solid credit to obtain a mortgage loan for a home purchase. These days, this is less true even if you have horrific credit.
One of the key factors in getting financing for your home is your credit. Lenders perform an analysis on your three credit reports maintained by Equifax, TransUnion and Experian. Okay, they buy the reports, but you get the idea. Regardless, these reports are combined and a FICO score is determined. FICO is short for Fair, Issacs, the company that created the grading scale.
The better your credit, the better the mortgage terms you will get. How is that for an obvious statement? Well, what if you have horrific credit? In the past, you were out of luck. No lender would touch you, although the local loan shark probably would. Well, things have changed and you no longer need to risk having your legs broken if you are late on a payment.
People with horrific credit can borrow money to buy a home. Yes, it is true. A certain class of lender specializes in just these types of loans. They are known as sub-prime lenders. Sub-prime refers to the fact you have less then stellar credit. You can file your application without grimacing because the lender already assumes you have bad credit.
These lenders will finance many people with bad credit, but there is a trade off. It comes in the cost of financing. You can expect to pay more points up front on the loan. You can also expect to get hit with a higher interest rate. Since the lender is taking on a borrower with bad credit, they expect to reap a higher financial benefit.
Another aspect of sub-prime mortgages you must grasp is the need to shop. The lenders offer vastly different terms. You might submit an application to two lenders and be approved. One lender may approve you with an interest rate of 7 percent, however, while the other wants 9 percent. That 2 percent difference can cost you tens or hundreds of thousands of dollars over the life of the loan. As a result, it is critical that you shop among the sub-prime lenders to come up with the best deal. Using an independent mortgage broker is the best way to do this.
Almost nobody has perfect credit these days and lenders know it. If you have horrific credit, don’t fret. There is a lender out there for you.
Sergio Haros is with Great Western Mortgage - California bad credit mortgage loan solutions.