Owning a home is one of the biggest dreams a person can have. Most people can get a mortgage easily because they have good credit. People with bad credit are usually stuck with rentals – at least that is what they think. Actually, for people with awful credit, a poor credit mortgage is available. There are several popular options
FHA Mortgage
An FHA mortgage is one type of mortgage for people with bad credit. The Federal Housing Administration backs this type of mortgage instead of a bank alone. Because it is a federal organization, there are different qualifications that you must me to get approved.
To qualify for an FHA poor credit mortgage, you need to have a job with a stable work history of at least two years, with the same company or without a gap between jobs. If your have filed bankruptcy, it has to be at least two years old and your credit has to be perfect after filing. Your credit score must currently be 620 or better and you must have under two 30 day past due payments on your history.
If you have had loans before, they must be paid in full. If you have defaulted on a loan, it cannot be within the last three years. You must also have at least 3.5% of the home’s cost in savings. There are such particular requirements due to the fact that you have poor credit. Lenders consider you as a high risk borrower, even if you are approved by the FHA and are guaranteed a loan.
Home Equity Loan
A home equity loan is an ideal option when you do not qualify for another type of poor credit mortgage and you already own a home. You can either own your home outright or have an existing mortgage. The main purpose of this type of mortgage is often chosen by people who need money for emergency expenses or paying bills.
Home equity loans rely on the value of your home. Based on the value and interest rate that you qualify for, the lender will offer you an amount and a plan for repayment. The amount of this loan is then added to your current mortgage.
Qualifying
Qualifying for any bad credit mortgage loan will depend on many factors in addition to your credit. These factors include:
- Debt to income ratio
- Loan to value ratio
Debt to Income Ratio
During the poor credit mortgage application, lenders review your debt and income. The ratio is reached by comparing them. If you have more debt than income, you are not going to get approved easy. If you have more income than debt, you will not be high risk. They are trying to determine if you can make your payment.
Loan to Value Ratio
Without getting too technical and complicated, this factor is generally used for home equity loans. You will need an appraisal to show the value of your home. The lender will then compare your home’s value with the amount you need to borrow. For poor credit, you are more likely to be approved if you keep the loan amount less than 70% of the value of the home. If the loan to value ratio is used for a new home purchase, the lender will use the smaller amount of the sale value or appraisal. For a home equity loan, only an appraisal is used.
The process of a poor credit mortgage is going to take some time. Even if you went to a lender armed with every piece of documentation related to your whole life, there is still going to be time involved. The length of the whole process will vary. If you choose a mortgage broker, most of the time will be spent on the broker is negotiations with financing companies. On the other hand, if you go directly to a bank, the time is much shorter because negotiating is not necessary. That said, there are a few things to keep in mind or prepare in advance.
First, you should get a copy of your credit report on your own and make sure it covers all three reporting bureaus. Once you have your report, review it completely. Look at every entry. Most importantly, look for inconsistent reporting, like accounts that are shown delinquent but are current.
Although a lender will have your credit report, it can help the poor credit mortgage process if you get statement letters for three to five accounts. They can be from businesses that do not report payment history to the credit bureaus. These letters must state the length of time you have had the account and if you have paid on time.
You will also need to write a letter of explanation for the negative things on your credit report. In this letter, you should also discuss how you would stay current on the mortgage payment you would have if you get accepted. You need to show that you have the ability to pay your mortgage loan. Without this statement, a lender will have no idea that you could be a good candidate and pay your payments on time for the entire term of the mortgage.
Proof of previous housing will also be necessary, which helps prove your stability. If you do not have a lease for your current residence, you will need receipts for at least one year and a rental statement from the owner. If you have a lease agreement, the agreement and receipts will work. They must have contact information for your landlord or the owner of the property.
As part of your preparation, you should be saving money. You will need to provide a down payment for a new loan. For an equity loan, you will need at the payments for at least a few months; if this is not possible, your income must be substantially higher that your debt. The amount of the down payment you will need is going to depend on the amount of the home and the interest rate – which will be much higher than traditional mortgages.
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