Should You Apply for a Mortgage with Bad Credit?
Written by: Kristy Welsh
Last Updated: August 10, 2017
One of the top reasons people turn to this website is to find credit repair information. The number one reason people want to fix their credit is to buy a home. But how "fixed" or "repaired" must one's credit be to apply for a mortgage? In a competitive housing marketing, waiting until your credit is squeaky clean could mean losing the house of your dreams. You can apply for a loan cost even if you pay more for a loan due to bad credit.
The logic behind encouraging people with bad credit to hold off from applying for a mortgage is that a person with bad credit could find it more difficult to get an application approved due to having a low credit score. Subprime customers may also find they're charged a higher rate of interest, which can make repayments higher and therefore less affordable.
While these seem like logical arguments on the surface, there is a deeper reasoning beneath that could indicate several good reasons why people with bad credit should consider applying for a mortgage sooner rather than later.
Apply for a Home Loan
You Don't Know Until You Apply
It's human nature to fear the unknown. Many people think their credit is way worse than it actually is. Why not apply for a loan in advance so you know how you rate?
Don't get Stuck on the Interest Rate
Do the actual numbers, rather than reject a potentially high sounding interest rate. Can you afford the payment? Have you found a home you like that fits the loan amount you qualify for at that payment? Then don't worry about the interest rate presented. You can continue to work on your credit and refinance at a later date.
Buy at a Low Price and Build Equity
Right now, the real estate market is low. While all real estate markets go through down times, they also have periods of growth too. These cycles have been happening for decades. While I wouldn't begin to be crazy enough to guarantee you that real estate prices will be going up, historically, real estate prices have steadily increased through the entire history of the US. Like the stock market, you just have to buy and sell at the right time.
Buying a home sooner and applying for your mortgage even with bad credit could potentially save you tens of thousands of dollars as the real estate market begins to recover and homes become more expensive.
It's a Lifestyle Choice
Owning a home isn't always the best financial choice. The average American homeowner never actually pays off their home, but either refinances or buys a new one numerous times over the years. If you were renting during the last crisis, your investments could have been somewhat insulated from the crash.
However, if you're tired of noisy neighbors in an apartment complex and love doing home improvements, owning a home can be the way to go. While renting a house is just fine, sometimes it just doesn't feel like home unless it's yours.
Rebuild Your Credit
Once you have been approved for your bad credit mortgage, you have several opportunities to work on increasing your credit score. Every repayment you make on time is reported as responsible financial behavior, so this action alone can help to improve your score.
Mortgages are a type of an installment loan, meaning it is loan with fixed repayment time period. An other example of an installment loan would be an auto loan. A "Paid as Agreed" mortgage loan is given the most weight by Fair Isaac in calculating your FICO score.
Re-Negotiate Your Loan
Once you've managed to improve your credit score a little with your regular mortgage repayments, you should find that your bank will suddenly be more willing to negotiate with you for a reduction in your interest charges.
As your credit steadily improves, you'll be able to negotiate for even further rate reductions, which should in turn reduce your repayment amounts and make your budget even easier to manage.
Once you're in your own home, you have the opportunity to begin building equity. Your equity is the amount between the value of your home and the balance outstanding on your mortgage. There are two primary ways to build equity; increase the value of your home or decrease the balance of your loan.
Paying Extra Principal
No matter what your minimum repayment is, try to find even a couple of dollars each month to round your payment up to the nearest $10. For example, if your minimum repayment is $813 per month, round this figure up to $820 and make sure to pay this little bit extra whenever you can. If you do pay extra over the set mortgage payment, make sure your bank knows the extra amount goes towards principal, not interest.
Refinance at a Later Date
As your level of equity increases, you might find your bank is willing to help you consolidate some of your other outstanding debts into your mortgage. This can help you to pay off any personal loans, student loans, store cards or credit cards that you have, which can also have a follow-on effect of helping to improve your credit score even further.