Buying a Home With Bad Credit


If you have bad credit, you don't necessarily have to sacrifice the dream of owning a home. Mortgages aren't reserved for only those with good credit.

If you have bad credit, there are home loan options out there. But keep in mind, the worse your credit situation, the higher the interest you will pay. Your interest rate affects your buying ability, your monthly payment and the overall amount of money you repay the lender.

Sub-prime loans are available to potential home buyers with bad credit. These loans consist of two parts. The first part is the down payment. The down payment shows the lender that you are serious about repaying your mortgage. You have now invested your own money into the home, which makes it in your best interest not to default on the loan. The higher the down payment, the lower your interest rate may be. Large down payments look really great to lenders. If you think your credit may disqualify you from a mortgage, a nice down payment will definitely put you back in the running.

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You should have at least 20% of the potential purchase price reserved for a down payment. Any less will mean that you will have to pay extra for private mortgage insurance to protect the lender in the event that you default on the loan. You are already facing a high interest rate, so don't add any more to your monthly payment than necessary. Pay at least 20% down on your mortgage.

But don't forget that you will also need money for the closing costs and other various expenses. Lenders like to see that you have enough to cover your down payment, your closing costs and your first monthly payment in your savings and checking accounts. Really building up your savings will counter your poor credit situation.

The second part to a sub-prime mortgage is the actual home you have chosen. Most lenders approve you as a borrower, but they still have to approve the home. The home must be appraised by a licensed appraiser, who will report the value of the home to the lender. The value must meet or exceed the amount you are hoping to borrow. If it doesn't, you will have to come up with more money out of your pocket or find another home.

In general, you will find that there are few differences between a traditional mortgage and a bad credit mortgage. Those with bad credit will need a larger down payment and will probably be required to answer more questions and fill out more in the application process.

Many advisors will tell you to wait until your credit score has improved -- usually two or three years. This will get you a lower interest rate. Some say go ahead and get that mortgage now. It will help you rebuild your credit. If rates stay favorable, you can always refinance in two years for a lower rate.

No matter if you are taking out a bad credit loan or a great credit loan, keep in mind that you have to be able to afford the loan. Take the time to shop around for a sub-prime mortgage. Compare rates and terms to find the most favorable loan. You can save a lot of time and money by simply shopping for your loan first and your home second. Know what you can and can't afford. Know what your bad credit will cost you and consider all of your options carefully. You may find that it is a good idea to buy right now. Or you could find that you should go ahead and wait a few years while you repair your credit. Keep your goal in mind. You don't have to sacrifice owning your own home just because you have bad credit.


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