Finding An Affordable Home Loan Even With Bad Credit

by Chris Lang on February 23, 2011

Bad Credit Loans In today’s economic world, developing bad credit is a relatively easy task to accomplish. Whether you have gotten yourself into credit card debt, defaulted on a payment or even filed for bankruptcy, a bad credit rating can seriously affect your ability to secure a home loan. It is not necessarily over for you if have bad credit however. Today, there are a few options for those of us with bad credit.

Step 1: Know Your Credit Rating

The first step is to know exactly what your credit rating is for sure. You may think that your rating is better than it is, but only by checking up on it can you be sure. Miss a few credit card payments and your credit file could be preventing you from getting an affordable home loan. So before you make any other decisions, find out your actual credit information by contacting Veda Advantage. Read over your report carefully and determine if your credit report lists you as a high risk borrower. Once you are 100% sure of your credit rating, you will be better informed on what your next steps should be.

Step 2: Consider Your Options

Once you have checked your credit report and understand why you may be considered to be a high risk borrower, now you have several options to consider. Getting a decent home loan may still be in the cards. It will depend largely on your specific situation, but there other ways to obtain a home loan, even if you have bad credit. Right now you have two options: you can try for a bad credit home loan, or you can take steps to repair your credit and go for a regular home loan sometime in the future.

Option A: Get A Bad Credit Home Loan

Option A is to contact a bad credit mortgage lender and discuss the possibility of getting a bad credit home loan. A bad credit home loan is also referred to as a non-conforming home loan. These loans are designed for people that most lenders would consider to be high risk. Whether you have defaulted on other loans or even if you have declared bankruptcy, a non-conforming home loan could still be used to get you the funds you need to buy your dream home. It could also be used to help repair your credit reputation.

What is the catch with non-conforming home loans? Well because most lenders will see you as a high risk borrower, the home loan that you apply for will most likely have a higher interest rate. These loan types typically have interest rates anywhere from 1% to 3% more than a traditional loan. A non-conforming home loan will also only cover 80% of the total value of the property, meaning that you will have to raise at least 20% for a down payment on your own. You will also have to raise the funds to pay the taxes and stamp duty on your own. This is true even if you have a guarantor to back you up.

In order to successfully apply for a non-conforming home loan, you must be employed and be able to show that you will be capable of making the repayments on time. This means your employment has to be long term, you cannot base the loan on collecting a pension or with no employment. You must also not currently be listed as bankrupt. If you have any outstanding debts listed on your credit file, these debts will have to be consolidated and added to your non-conforming home loan. As your loan amount can still only be 80% of the property’s value, adding outstanding debts will reduce the amount of money you can borrow towards the home. In short, a non-conforming home loan will still give you a chance at home ownership if you have bad credit, but at the cost of a higher down payment and a higher interest rate. The good news is that if you can show the lender a good repayment schedule after you have been granted the loan, they may be able to reduce your interest rates down the road.

Option B: Repair Your Bad Credit

Repairing your bad credit is possible. First, if you find that you have a negative credit report, you should immediately and carefully check it for mistakes. Almost 1/4th of credit files contain mistakes that could lead to defaults. These mistakes can include misspellings, inaccuracies, old defaults and wrongful personal details. Report any mistakes in writing to the credit agency to ensure that these mistakes are removed. This alone could improve your credit score.

The next step towards repairing your credit is to pay all of your outstanding debts. By doing so you will show that you are taking steps to improve your credit and spending habits and it may improve your score down the road. If you have more than one outstanding debt, you may have to take out a debt consolidation loan at a low interest rate to start paying these debts off. Paying off your debts is essential to repairing your credit.

You will also need to work on creating better spending and savings habits. Open a savings account and add to it. Pay your bills on time by setting up auto-pay and online bill pay schedules. Pay attention to all of your payments. Add any information to your file that could help your rating. For example, add in if you have recently gotten married, bought a home or if you have worked with a single employer for more than two years. Develop better spending habits. Get rid of most credit cards and spend less than you earn. Focus on living within your means. These actions will work together to eventually improve your credit rating.

Step 3: Take Action

Now that you understand what some of your options are to get a home loan with bad credit, take action. You should definitely begin taking action towards improving your credit through the steps listed. If you choose to take out a non-conforming home loan, make it a point to pay on time. Regular repayments to a non-conforming home loan will result in improved credit down the line. While bad credit doesn’t necessarily mean you will not get the home loan that you want, bad credit still has long ranging negative effects on your future and should be treated immediately.

Timothy Ng lives, breathes, and sleeps personal finance! Check out his in-depth guide to doing a balance transfer for life where he answers everything you need to know before doing an online credit card application.

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{ 2 comments… read them below or add one }

Australian loans for bad credit March 23, 2011 at 8:48 pm

Today its very difficult to find best loan service or company according to our requirement. Always check previous history and don’t forget to match the loan interest rate provided by different loan organizations. Reparing bad credit is possible but not so easy as the people thinks.

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Liz December 29, 2011 at 1:29 pm

Out of ten houses we’ve asked for loan none of them accepts my friend because of her bad credit record. I don’t know why is it that hard to find a house loan even with bad credit. Hope online i can find ways to find her a house loan, i just hope so.

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