How to Get a Bad Credit Mortgage in 2010
Think it's impossible to get a loan today if you've had past credit problems? It's not impossible, no, but it's not easy either. Here I present you with a series of preparatory steps to help you increase the odds of securing your dream home.
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Instructions
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Step back, and analyze the reason why you have bad credit in the first place. Was it by misfortune, say a job loss prevented you from making timely payments, or perhaps from unexpected medical debt that went to collections? Or, were you just "keeping up with the Joneses" - being irresponsible with credit card debt, running it up to limits you couldn't pay? Only you know you, and only you can make an honest assessment of your own situation. This is important because the nature of the bad credit is important when applying for a loan. Also, keep in mind that 'good' credit isn't the sole determining factor in your eligibility for a loan. Debt to income ratio, income, assets (savings and investment), length of time with employer, etc... all figure into the equation. So, get ready - there's a lot of work ahead of you!
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Next, ask yourself this question - "Am I *really* ready to own a home and mortgage?" Being ready to own a home isn't just about being able to make the payments - it's also about having the proper attitude about personal finance and money management. A home is a bigger responsibility than a car, and when things go wrong, are you prepared to handle them? Besides, if your still struggling with bills, why would you consider adding the biggest one of all?
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Up to this point, I have been operating on the assumption that you know you have bad credit (e.g. - you know you have missed payments, etc...) - but have you actually looked at your credit report? That's the next step - obtain a copy of your report from all three credit bureau's and a copy of your score directly from FICO (you might want to experiment with 3rd party services, just make sure you get the actual FICO score, not the bureau's own score). You may be shocked at what did (and didn't) get reported during your time of trouble.
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After you've looked at your report and taken a sedative, I can assure you that the report is likely filled with errors (some deliberate) - especially if collection agencies are involved. The bureau's make no effort to keep a clean file (even though they are legally liable for the errors), but instead rely on the creditor and debtor to challenge the authenticity of the information. This is where you need to try to fix the errors, and misleading information on the report. This is a deep, and involved topic that's too complex to discuss here, and may involve you threatening or taking legal action. See the resource section below for more information.
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Your situation may be bad for a number of reasons - and even after the errors/illegal entries are cleaned up, your situation may still be bad. One of the ways you can immediately improve the situation is to make sure you are current on all your bills. This involves catching up the balances on all revolving debt and keeping the payments current for a couple of months. This may or may not have an effect on the coveted credit score.
Obviously, this may take some time - but it's a necessary step to take - and besides are you really ready to absorb a mortgage if you can't meet your current obligations?
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Now that you are current on your bills, pay down the balances to a reasonable level. If balances are out of control, you can (and should) call your creditor to see if you can get a break on some of the late/over the limit fees and a lower interest rate on the existing balance. You do not need a debt consultation firm to get this done, most revolving debt creditors offer the same 'help' to everyone - you just need to ask.
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Next start to build up savings. If you do not have a savings account, open one at your current bank, and also join a local credit union. I would recommend putting most of your savings in the credit union account, as they will be one of your best chances at a loan when the time comes. Savings (not to be used for down payment) will demonstrate to lender that you have assets - which is one part of the puzzle, but not necessarily that you will make your payments on time.
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If you are able to, spend time and save for a down payment. Almost every lending institution will require a down-payment now, so you need to come to the table with something. What percentage this is varies greatly from lender to lender.
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Lastly, and perhaps most important, is lender selection. If you were able to do everything above - and all you have are some past issues on the report, you can start to look at potential lenders. Steer clear of the internet ads with the dancing shadow figures, and the ads that claim that Obama has a mortgage plan for you. It's utter nonsense, and a lot could be false advertising.
If you opened an account at a credit union, I would start there. Loans from credit unions are more personal then from a large bank - and, although they will look at your credit score and report, they will also take your personal story into account. Second, I would go to the bank where you have maintained your main account the longest - especially if you have other current loans through them, such as a car. If you have been a good customer, perhaps you will get better treatment. Finally, you can try a mortgage broker that deals with FHA loans. The FHA loan doesn't look at credit scores - which removes one problem, but does require 3% down and will look at the contents of your report. Regardless of who you choose, if you do get a mortgage, expect to pay more for it today - you can think about refinance it later on, when things drop off the credit report.
If none of these options look good, my advice is to wait - rather than delve into the remnants of the subprime industry (yes, they are still around). While there are a few ok companies left, they will be hard to find, and there are no guarantees.
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Some final words of wisdom. As you can see, this can be done, although the process is lengthy if your problems were recent. It's lengthy enough that it may eclipse 2010, even with the best effort put forth. However, the lessons learned will help you going forward in all aspects of your financial life.
Best of Luck!
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Tips & Warnings
Editorial - Credit scoring is crap, plain and simple. Every credit report has a story, and a person cannot and should not be reduced to an ambiguous number as a judge of character or creditworthiness. Nonetheless, it's here and it has to be worked with.
You have a better chance at success the further removed you are from your credit problems. If your problems are recent, you might want to put this off for a year or two.
A little bit of editorializing here - many errors on credit reports are not actually errors - but rather malicious and deliberate entries to make the situation look worse (or more current) than it actually is. See the resources below for more information.
Resources
- Photo Credit foreclosurelisting.com
