Since the sub-prime mortgage crisis, it has gotten difficult for those with bad credit to secure mortgages. Now, this might actually be a good thing, because many that have bad credit shouldn’t be purchasing homes. That was the reason why we even had a sub-prime mortgage crisis. People were being loaned money that they couldn’t ever pay back. Now, that the economy is ramping back up and real estate is on the rise, people are looking for mortgages. They might be looking, but it is hard to find a mortgage. Luckily, there are options for those with bad credit.
Now, you might tell me that people with bad credit shouldn’t purchase homes. I would generally agree with this sentiment, but I have met quite a few people in my years that had bad credit, but their balance sheet was strong. Why? They had bad things happen in the past that affected their credit score and it just hadn’t come back up. With a bad credit score, they were considered sub-prime borrowers with many banks.
What Does It Mean to be Sub-Prime?
There are typically a few reasons why people are considered sub-prime. Now, these factors are all different depending on where the loan is trying to be obtained. These are just a general rule.
- A low credit score – typically less than 650
- History of late payments
- Foreclosure or charge-off
- DTI (Debt-to-Income) ratio too high (50% or above)
- Bad income to expense ratio
As you can see, there are quite a few reasons why someone would be a sub-prime borrower. Now, if you have a DTI that is too high or a high expense to income ratio, then you shouldn’t be looking for a mortgage in my opinion. If you have had a bankruptcy or a bad credit score, then I think you could still be eligible to get a mortgage.
Sub-Prime Mortgage Options
As I stated, there are still options available for sub-prime borrowers. Yes, it can be a little more difficult to secure a mortgage, but it can be done. Before you go searching for a mortgage lender, make sure you understand your credit score and credit report. I recommend Credit Sesame for checking your credit score for free. If you have already used annualcreditreport.com, then you will need to check out Equifax or TransUnion.
Once you make sure that your credit report is OK, then you need to look for lenders that will be willing to let you borrow money. As stated, it is going to be difficult to find someone to give you money if you are sub-prime. You could go out and look for lenders one by one, but that wouldn’t be productive. You need to search for lending services in a quicker fashion and with more lenders. You want higher numbers of lenders in order to increase your chances for approval. In order to do this, you should look to a mortgage broker or service that can help you find multiple offers. If you want to start your search, try Loan Lenders or if you are in the UK, try Just Bad Credit. These two services should be able to help you.
You need to make sure you understand that you will pay more for your mortgage loan. You will get a higher interest rate than what is advertised, you will most likely have to pay private mortgage insurance (PMI), and you could even have other fees. Be aware of this situation and calculate these into the overall payment.
Work to Change Your Situation
While you might be able to get a mortgage loan when you have bad credit, you should still work hard to make sure and change your situation. If you have bad credit, you need to understand why and figure out ways to improve your credit. Improving your credit takes time and there is no magic bullet. You need to get our debt-to-income ratio under control. You have to make your payments on time, and you need to make sure not to take on any more debt. Yes, these are simple tips, but they are very effective. Your dream of owning a home doesn’t have to wait until you have great credit, but you should certainly work hard to change your current situation.
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