The Reality Of Bad Credit When Buying A Home
If you’re thinking that your less-than-stellar credit is nothing more than a minor bump on the road to homeownership – you’re in for a rude awakening. According to Trulia, post-bubble is tightening on mortgage lending restrictions, making the road to home ownership less than freshly paved and smooth going for anyone with a few hiccups in their credit history.
The good news is that whatever has happened in your credit past is in your past. The bad news is that you might not like what you have to do in order to take control of your credit profile and prove you’re a worthy credit risk to mortgage lenders.
The Costs of Bad Credit
There are few people who get through life without a blip or two on their credit profile. However, if your blips are more along the lines of a heartbeat and your payment history hasn’t been stellar, mortgage lenders want you to know that you’re a higher risk. Since they know you haven’t paid on time in the past, you’ll face higher interest rates as a borrower. This is how the banks make it make sense to lend you the money for your mortgage.
Credit scores range from 300 to 850. The lower end of the spectrum is generally reserved for those with little credit experience. But what if you have credit experience and it just hadn’t been good? Well, the good news is that those with bad credit can still get a mortgage with a credit score in the low 600s. Programs vary for scores in those ranges, but even if you can get a mortgage, you’re a higher risk and that translates into higher interest rates. Let’s look at what the real costs of bad credit can be in a mortgage scenario.
A $200,000 mortgage at a rate of 4.5% (a rate reserved for those in the 740+ range), a borrower can expect to pay $165,000 in interest over a 30-year loan term.
If your score drops into the 600s, you could be looking at a rate of 4.875%. While those numbers don’t seem much higher, that translates to a rough total of $181,000 in interest over the life of a 30-year loan. That’s an increase of $16,000 – money that I’m betting you’d rather use to pay for anything interest on your mortgage. That doesn’t even take into account private mortgage insurance (PMI), a requirement for all FHA loans that can add over $100 per month to a mortgage payment.
Improving Your Credit and Prepping for the Mortgage Process
So, how can borrowers with less-than-perfect (or even bad) credit get themselves set up to not just qualify for a mortgage, but save money on interest in the long term? Petersen offer a few simple tips to make you a better borrowing risk.
Know where you stand. Many folks have no idea what’s on their credit reports. The first step to boosting a bad credit profile is to see where you stand. Order a copy of your credit report from all three bureaus (Equifax, TransUnion, and Experian). This will let you know if there are errors in need of correcting, collections in need of paying, and let you set a budget and strategy for bringing all of your obligations up-to-date.
Make the commitment. Once you know where you stand with your credit profile and scores, you have to commit to improving those. Doing what you did in the past is what got you where you are, so ask yourself: How will I make sure this won’t happen again? Many mortgage lenders will ask for a personal statement from borrowers with bad credit to indicate why they feel they’ve become a better lending risk and how they intend to keep their past credit mistakes in the past.
Get on track. It’s not just about getting past obligations caught-up and paying current debts on time. This is a great time to keep your debt to a minimum. Keep your credit card balances low, using only 30% of your available credit on any card. Using higher amounts can lower your credit score and tell banks you’re not living inside your means. It’s also a prime time to meet with a mortgage professional. He or she can help you chart a plan of action to prep you for a future mortgage application process. Improving your credit is never a fast process, but it can be a smooth one when you are armed with good advice and a solid strategy.