Some people feel that it’s impossible to buy a house after a recent bankruptcy or foreclosure. While people with impeccable credit experience easy financing and qualify for the best mortgage rates, there are also mortgage loan options for people with bad credit.
Several factors play a role in bad credit, such as filing bankruptcy, a foreclosure, judgments and collection accounts. These negative marks can drastically lower your credit score and prevent all types of financing. But if you’ve learned from your mistakes and you’re ready to start anew, perhaps it’s time to consider a bad credit mortgage.
Mortgage lending rules have tighten in recent years with many lenders imposing tougher credit requirements. Banks set high standards because people with excellent credit are less likely to default on their mortgages, thus lowering the bank’s risk. Qualifying for a traditional conventional home loan requires a minimum credit score of 680 – 700.
With these higher credit score requirements, many people with adequate income and cash reserves find themselves unable to qualify for a home loan. While this make sense from a banking standpoint, it doesn’t benefit those on the threshold of good credit. However, whereas prime lenders will not take a chance on a person with a low credit score, bad credit mortgage lenders specialize in loans for people with less than perfect credit.
Understand that bad credit mortgage loans aren’t available to everyone with bad credit. There are limits. And before approving your loan request, the lender will carefully review your present credit habits. Bad credit mortgage lenders realize that it takes time to rebuild a bad credit score. Thus, a foreclosure or bankruptcy in your past won’t necessarily disqualify you for a home loan. As long as sufficient time has passed and you’ve demonstrated good credit habits since either incident.
Mortgage requirements vary by bank or loan product. But on average, qualifying for a bad credit mortgage requires a minimum credit score of 620 to 640. Most lenders allow no more than two 30-day late payments in a 12-month period. And depending on the lender and the type of loan, you have to wait three years after a foreclosure and two years after a bankruptcy.
Although bad credit mortgage loans involve higher down payments and higher interest rates, these loans might advantageous. If you’re rebuilding your credit history, adding a mortgage to your credit file can give your score a much needed boost. Bad credit mortgage lenders will report your account activity to the credit bureaus each month. Consistent timeliness on your part equals positive updates.
As your credit score improves, there is the option of refinancing the mortgage loan and acquiring a prime mortgage rate. This can translate into a lower home loan payment, plus you will pay less interest over the life of the mortgage loan.