If you have a low credit score (less than 680) and you're looking to buy a new home or refinance an existing home you may think your loan choices are very limited.
This is simply NOT true.
Here's why
Low credit scores strongly impact the interest rate you will receive, however other factors can effectively equalize your risk profile in the eyes of a mortgage broker - possibly lowering your interest rate.
So how can you get the lowest interest rate even with bad or damaged credit?
You should keep these 3 points in mind as a bad credit borrower:
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1) You MUST shop around.
Studies show that borrowers with bad credit shop less than those with higher credit scores. There is a misconception that bad credit borrowers are simply not as aggressive when it comes to comparing loan quotes.
One recent study revealed how a person was offered a rate 6.875% from one lender and then 11.125% from another broker. This is for a 30 year fixed rate on a $240,000 dollar loan.
This extra 4.25% in interest would increase the monthly payment by about $730 per month in principal and interest. A cost incurred by simply going to the wrong mortgage broker.
2) Your Debt Ratio Matters
The source of your bad credit in the past was probably from lack of income. Things change and life does get better! If your income has increased your debt ratio will decrease making you less of a risk.
A reputable mortgage firm will take this into consideration since it's highly likely that your ability and willingness to pay bills on time is directly related to your increased income.
The mortgage broker should look at the entire credit report and determine that although you may have defaulted in the past, you do not pose a high risk now.
3) Do You Have a Few Months Savings?
Having a few months' savings to live on will equalize the negative effects of a low credit score. Again, a good mortgage broker will recognize this and compete for your loan knowing that you've demonstrated fiscal responsibility.
There are many mortgage companies who specialize in bad credit loans and will fight for your business!
There is no reason to accept the first loan quote you receive. Walk away if you feel your income, debt ratio and savings were not considered by the mortgage lender.
Fire the broker and find one that is competitive!
Below is a link to some of the more competitive bad credit lender websites.
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