ABC of Bad Credit Lending

By now, nearly everyone is aware of something called a credit score, but most of us have no idea what the score actually means or how it is determined. In fact, the only thing most of us know is that if our score is too low, many home mortgage lenders won’t give the same interest rate as a person with a higher score. The higher the credit score, the more likely someone is to get a better interest rate on their loan.

So What Can a Home Buyer Do?
Obviously, many people have lower credit ratings due to job loss, divorces, health problems, failed business ventures, etc. Others simply have poor credit ratings because they have neglected their obligations to repay creditors in a timely manner.

Regardless of the reason, recognize that there are opportunities to still purchase or refinance your home, but it is just as important to view this as a second chance – a new lease on your financial life, if you will.

Take the time to carefully analyze why you ran into credit problems in the first place, and determine if you will actually be able to make your payments once the loan is granted. If you can reasonably determine that “yes,” you are in better financial shape now than when the credit issues occurred you might want to consider an Adjustable Rate Mortgage (ARM) for your financing option.

By doing so, you will gain the benefit of a somewhat lower interest rate, but it will only be for a short period (usually 2-3 years.) Additionally, most ARM loans have a prepayment penalty that equals about six months worth of interest. The thought process of taking the ARM loan is simple. If the financial problems are behind you and you can demonstrate to the new lender that you have changed your credit patterns, you will be able to refinance at a lower, fixed rate in two or three years. Similarly, you will have the benefit of a slightly lower payment than if you selected a fixed rate payment from the outset.

If, however, you continue to see financially turbulent times ahead such as job uncertainty, marital problems or health issues, you will want to consider a fixed rate payment in order to ensure a consistent amount due each month.

Who Purchase These Loans?
While most of the investors purchasing Sub-Prime loans are non-traditional lenders, recognize that Fannie Mae, a large government sponsored agency, is beginning to move into this lucrative market. As a result, many loans that used to go non-conforming can now go through traditional lenders, which may result in lower fixed rate payments for borrower. Be certain that your lender attempts to sell your loan to Fannie Mae before placing you in a private, Sub-Prime loan pool.

Is it Worth it?
YES! The benefits of owning a home far outweigh a slightly higher interest rate if your credit is less than stellar. Aside from the tax benefits, you gain equity, experience property appreciation and experience the pride that comes with owning your own home. Don’t let credit blemishes keep you out of the game!

By : ABC Loan Guide

Are you looking for a home and have a credit score below 620? You will probably have to obtain a low credit score home loan. Knowing how to prepare and what to look for will make the process easier.

Know your credit - Pull a credit report and find out your exact FICO score. Examine your credit report for any errors. Immediately report any discrepancies on your credit report.

Prepare your documents - Assemble a personal history file. You should have your tax returns for at least the last two years. Have pay stubs for a full calendar year or an income verification letter from your employer.

Save for a down payment - Every dollar put down makes getting a low credit score home loan easier. Down payments may also help you get a lower interest rate and a lower monthly payment.

Shop for lenders - Even borrowers with low credit scores will find numerous home loan lenders. Select several to interview. Check their backgrounds with the Better Business Bureau or obtain references from friends. Arrange to meet with your chosen loan agents. Discuss the amount of mortgage you can afford and the type of loan your credit will require. Even with a low credit score you may be able to pre-qualify for a loan. Pre-qualifying makes the actual hunt for a home much easier.

Negotiate terms - The low credit score home loan market is very competitive. Don’t be afraid to negotiate and don’t be intimidated by the lenders. Ask if better terms are available.

By : ABC Loan Guide

Americans are relying on their credit cards for more than just the occasional impulse purchase. According to a new study that was just released by Freddie Mac, one-third of low and middle-income consumers are currently using their credit cards to pay basic living expenses. And for many, that will begin the descent into bad credit.

Unfortunately, bad credit is a gift that keeps on giving each and every time you apply for a loan. And a mortgage is no exception. However, you don’t have to be a victim of your credit history when you apply for a mortgage because of something called a subprime loan. These are mortgages made to a borrower with bad credit or little or no credit history who would otherwise be unable to obtain one.

Here’s how they work. A prime or conventional mortgage is considered a grade A risk loan. Therefore, subprime mortgage loans are generally categorized into A–, B, C and D grade risk loans. The individual lender establishes the guidelines that determine the parameters of each grade. However, the basic principle in assigning risk grades is the greater the problems are with your credit history, the higher the risk of delinquency, default and loss, the greater the chance that you will be assigned to the highest risk grades like C and D.

Despite all of this, subprime customers don’t have to settle for the first lender that will provide credit. The increased competition within the subprime market has resulted in putting borrowers more in control of lending process. This control manifests itself in the ability to shop around for the most competitive rates. In addition, technology has given lenders automated underwriting and scoring tools that help in pricing loans and predicting defaults, which increases a lender’s capacity to provide more loans with attractive rates.

By : ABC Loan Guide