Not All Bad Credit Home Loans Were Created Equal
You already know that bad credit home loans exist even during hard financial times. You also know that bad credit means higher mortgage interest rates. So how do people get good bad credit home loans (is there such a thing)?
The main way to benefit is to understand what’s involved. The main distinction you have to understand is that it’s not low FICO scores that count the most when mortgage lenders consider your mortgage application but your credit history.
If you have good credit right now, say your middle FICO score is 700 but 9, 10 and 11 months ago you were late on your mortgage, mortgage lenders still perceive you as a risk. And rightly so.
So what do you do if you’re in the mood for bad credit home loans? And when advertised mortgage interest rates are as low as 4%, like they’re, you should be in the mood for a mortgage.
The first thing to do is figure out what kind of interest rate you’re likely to get. You don’t need to know that it’s going to be 9.75%; just that it will be over 9.5% and less than 10.75%. Something like that. A starting point.
Ask your mortgage broker how much your interest rate goes down if your FICO score goes up, what happens if you wait six months. You should also assume that your stay in the world of bad credit home loans is a temporary one.
Then you figure out if you can afford the highest monthly payments now or if you have to wait 6 months or more. Here, keep in mind that mortgage lenders, whether they’re giving bad credit home loans or not, let you get more mortgage than you can really afford. So don’t go by what the mortgage broker says you can borrow, go by what you and your gut think you can afford.
A good rule of thumb: your mortgage payments, private mortgage insurance (PMI), property taxes, electric, heating, water bills and property insurance should not be more than 33% of your gross income. Messing up here has the worst effects on bad credit home loans people, so don’t mess up.
Most people tell you that when interest rates are low you should refinance your mortgage right away. I’m going to disagree. The most important thing you can do is to take a look at your credit standing. If it’s bad, you need to find ways to improve your FICO scores. The world of bad credit home loans is made of loans with high interest rates and loans with very high interest rates.
A Bit of Effort and You Might Not Need Bad Credit Home Loans
Whether you’re dealing with bad credit home loans or not, your credit history determines if lenders will give you a mortgage loan at all; your FICO scores will determine what kind of interest rate they’re going to charge you for it. That means that if you make arrangements with creditors to pay them and pay them on time for a few months; if you reduce the amount you owe on credit cards; if you remove errors from your credit report, your mortgage interest rate is going to be lower, perhaps so much that you’re evicted from the world of bad credit home loans.
How much lower do mortgage interest rates go, really? That depends on your situation and the amount of time that passed since you had any lates or blemishes reported. But often you can jump up 60-100 points in 3-6 months. Sometimes more. Often that means that you’ve jumped at least one level higher in credit worthiness. It depends on lender. If you happen to make this kind of jump just when the current mortgage rates go down you benefit the most, but don’t count on rates going down.
But jumping a level higher can get your interest rate down a couple of points. If you started at 10%, now you might be at 8%. 2% interest on a $200,000 mortgage loan adds up to $4,000 the first year alone, a bit over $103,000 over 30 years.
Bad Credit Home Loans Conclusion
So if you’re interested in bad credit home loans because the low mortgage interest rates are telling you to get one yourself consider how fast interest rates are going to go up vs. your credit standing. Keep in mind that the FED meets only once every 3 months to decide whether to raise,lower, or keep the rate the same. Also keep in mind that the best way to benefit from Bad Credit Home Loans is to not have one.
Hope you leave the world of bad credit home loans and never return.