Think your credit score has little bearing on your chances of owning your own home?
We have some bad news for you. Many would-be homeowners are finding that the current tightening of mortgage lending restrictions is making their journey towards becoming homeowners all the more bumpy, especially if their credit history is a little less-than-perfect. Even after you’ve secured your home, your credit rating can still have an impact on the homeowners insurance premium you’ll have to pay.
If you’re in this situation, you’ll need to look at things realistically. What’s done is done, and whatever happened in your credit past is in your past. It can be fixed. Taking control of your credit profile and proving to mortgage lenders that you’re a credit risk worth taking can be very difficult but it is, nonetheless, possible.
Credit Scores and Your Mortgage
Nobody’s perfect, and very few people will manage to make it through life without one or two hiccups on their credit profile. This is normal. It’s when these issues become larger and combine with a less-than-fantastic payment history that you become a higher risk to mortgage lenders. As far as they are concerned, if you haven’t paid on time in the past, there’s every chance you won’t pay on time again. If this is the case, your interest rates will be much higher than you’d like them to be. This is how banks make lending money to high-risk borrowers viable. This is life. This means that home buyers who have good credit ratings are generally granted access to “A” loans, also known as Conforming Conventional Mortgage Loans or prime rate loans. These are the mortgages which have the best interest rate a lender can offer, according to current market conditions. They are made by for-profit lenders, without any form of insurance from the federal government.
Meanwhile, potential buyers who have low credit ratings will be offered Subprime Loans, a different standard of loan which a lender offers when the borrower doesn’t qualify for an “A” loan. These are loans which are calculated by a risk-based system of pricing. Your interest rate and fees are determined based on a complicated computerized evaluation of your circumstances and the likelihood that you will fail to pay your mortgage. Lenders have developed a grading system ranging from A- to D for their subprime loans where the lower your credit score is, the lower the your loan grade and the higher your fees and interest rate. Although these subprime loans can be expensive, this does not necessarily mean that they are risky. These loans can be a legitimate way for those with a lower credit score to become homeowners. Nonetheless, it’s important to remember that there is a fine line between reasonable and predatory, so you need to search carefully and keep an eye out for ridiculous terms and massive fees. Remember to also check out the other forms of loans available to you, including USDA Rural Development loans and FHA loans, home financing programs which were designed specifically with first time and low-income home buyers in mind.
Improve your credit rating
The other option for those looking for loans with less than stellar credit is to put in the time and effort to bring up their credit rating so they can qualify for a better mortgage and save themselves money on interest and fees in the long run. To do this, there are three main changes you need to make
1. Order a copy of your credit rating from a credit bureau (or all three).
2. Commit to not making the same mistakes which led to your current rating.
3. Get caught up with all of your payments, debts and obligations.
Alright, so that last point may be a little more difficult than the others, but it’s entirely possible. The final, and vital, step to improving your credit rating is to get on track. This means paying your debts on time, catching up with all of your previous obligations, and keeping future debts to a minimum. Try to make a point of only using 30% of the available credit on any card to keep your credit card balances low – higher usage than this can damage your credit score. It can also be helpful to meet with a mortgage professional, to work out how exactly you should prepare for your mortgage, when the time comes. As we said, taking control of your credit profile and proving to mortgage lenders
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