Home loans for people with bad credit do exist and can be found, although having a poor credit score does make the process more difficult. Additionally, there are bad credit home loans available from lenders that specialize in providing home loans to people that have poor credit.
It is important to note that lenders not only look at your score, but also at your credit history. This means that they will be looking for patterns and analyzing how much of a risk it is for them to extend a loan to you. While this may hurt your chances of getting a loan or cause you to incur penalties, it may also help you to avoid having to get a bad credit home loan. If you show signs of improving your credit and making payments in recent months and years, you will be much more likely to get a mortgage without the stiffest of penalties.
If you have a poor credit score, there are a few complications that you may encounter in the process of getting a home loans. Common problems that you may encounter as a result of bad credit are listed below.
High Interest Rates
Lenders that offer home loans to people with bad credit typically only do so with a high interest rate attached. You should always shop around and attempt to find the lowest rates available to you, but the fact of the matter is that a bad credit score will increase your interest rate.
High Closing Costs
In addition to high interest rates, high closing costs can be expected by people with bad credit scores trying to get a home loan. In general, closing costs will add an additional two to five percent to the total amount of the loan. People with bad credit will more often than not find themselves with closing costs exceeding five percent.
Pre-payment Penalties
Many lenders, particularly lenders that specialize in home loans for people with bad credit, will offer you a loan that comes with a pre-payment penalty. A pre-payment penalty is a stiff increase in your loan's interest rate when you attempt to pay it off early. These may also be added in as a flat fee
Required Collateral
The difference between a secured and an unsecured home loan is collateral. A secured home loan will require you to offer collateral in the event that you are unable to make payments or declare bankruptcy.
Unsecured loans do not require you to put up collateral in order to receive a loan. People with bad credit have a more difficult time receiving an unsecured home loan, and are typically required to provide collateral through a secured loan.
Tips For People With Bad Credit Trying To Get A Home Loan
While getting a home loan may be difficult, frustrating and stressful for those with bad credit, following the tips listed below can make the process easier.
- Get an up to date copy of your FICO score.
- Research your FICO score and be aware of and ready to explain anything negative on the report.
- Always shop around, do not take the first home loan you are offered without doing your research.
- Proactively work on and build your credit while you are in the process of trying to find a home loan. This means paying all of your monthly bills and working on reducing your credit card debt.
- Be honest with potential lenders, explain your situation and be prepared to show them that you are raising your credit score and making responsible financial decisions.
Remember, knowledge is power. Keep in mind, home loans for first time buyers often come with similar penalties, so you're not alone. Knowing why you have a poor credit score is the first step in correcting it. Getting a home loan is a big decision and there is no need to rush it. Figure out your options, approach multiple lenders, and compare what they have to offer you.
