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Guest Post by CreditRepair.com It is very easy to make financial mistakes that damage your credit. Once your credit score drops, it can be challenging to obtain financing for a large purchase such as a home. If your past financial history has sunk your credit score, you may think that buying a home is out of your reach, but that is not necessarily true. It is possible to obtain a mortgage even when you have bad credit, but it will require persistence, planning, and patience on your part. Understanding what is required to obtain a mortgage with bad credit, as well as the advantages and disadvantages, may help you make a decision that's right for you. Advantages of homeownership Homeownership can benefit your financial situation in many ways. For example, some of the expenses related to owning a home, such as property taxes and mortgage interest, may be deductible when you file your annual tax return. Additionally, if you are a low- to moderate-income first-time homebuyer, you may be able to receive a mortgage tax credit certificate that will reduce the amount you have to pay in taxes every year. Though it can be a challenge to obtain a mortgage with bad credit, having a mortgage may help improve your credit score. Payment history including paying all your bills on time, is a factor that helps to determine your credit score, and making mortgage payments on time may reflect favorably on you in this regard. Furthermore, as you make mortgage payments, you build equity in your home. When you first make a home purchase with the help of financing, your mortgage lender has a significant interest in your home. But as you pay off the mortgage, your interest in the property increases as your lender's decreases, and you own a larger portion of the home until the loan is paid off. The portion of the home that you have paid off is referred to as your home equity. Equity is an asset that you can borrow against. If you owe a significant amount in credit card debt, you may be able to consolidate it with a home equity loan, decreasing your credit utilization ratio and potentially improving your credit score as a result. Disadvantages of obtaining a mortgage with bad credit When your credit is bad, lenders regard you as an investment risk. Understandably, this makes them reluctant to finance your mortgage. You may have to do a lot of searching to find a lender that is willing to extend a loan to you. Even then, the lender will likely make exacting demands of you that it wouldn't require from someone with a higher credit score: Homebuyer education — You may have to attend a homebuyer education course approved by your lender before it will let you take out certain types of mortgages. Greater down payment — It is often recommended that homebuyers be prepared to pay 20 percent of the purchase cost as a down payment to avoid paying for mortgage insurance. You can also find mortgages that don’t require any down payment or only require 3.5 percent or 5 percent down. However, if you have poor credit, you may need to put more money down. Higher interest rates — Another way that lenders protect themselves when financing someone with bad credit is by charging higher interest rates than they would otherwise. Accepting a higher interest rate may allow you to obtain a mortgage that would be out of your reach otherwise, but it will increase the amount you will have to pay each month. You will have to weigh the disadvantages of obtaining a mortgage with bad credit against the advantages of homeownership as they apply to your current situation to determine whether it is worthwhile for you to attempt to purchase a house now or wait until you improve your credit score. Tips for obtaining a mortgage The best way to avoid the disadvantages of bad credit when applying for a mortgage is to improve your credit. This is accomplished via two steps: Decrease your credit card debt and pay your bills on time.These are relatively simple steps, but rebuilding your credit this way takes time. If you can't wait or don't want to wait until your credit improves, here are some other steps you can take that may help:1. Know your credit scoresKnowing your credit score can help you evaluate your options. You can get your credit scores from different sources, including the credit bureaus, FICO, and third-party providers. However, most mortgage lenders use specific types of FICO Scores, and only some companies sell these scores.2. Check for errors Everyone makes mistakes, including credit-reporting agencies. It could be that there are errors on your credit report that are lowering your score. Check your report for any errors and take steps to correct them before applying for a mortgage.3. Understand what makes a good credit scoreIt's not enough to know what your credit score is; you need to understand how lenders will perceive it. Credit scores range from 300 to 850. Anything above 700 is considered good, and you may have difficulty obtaining credit if your score is 600 or lower. 4. Shop aroundCredit scores between 600 and 700 are something of a gray area. Some lenders may consider you a credit risk and refuse to lend to you if your credit score is within this range, while others may be more willing. Be persistent in your search for a lender; just because one says no, it doesn't mean they will all reject you.5. Consider an FHA loanThe Federal Housing Administration seeks to help people buy houses who ordinarily wouldn't be able to afford to. Therefore, they guarantee mortgages, allowing lenders to offer loans with less stringent requirements when it comes to credit score, down payments, etc. However, you should know that there isn't a special, separate government lender providing FHA loans. You obtain them the same way you would get any mortgage — through a financial institution. Be aware that a mortgage lender can still refuse to extend you an FHA loan, even if you meet the FHA's minimum requirements. 6. Enlist the help of a cosignerYou may be able to obtain a mortgage that you wouldn't otherwise be qualified for if you have a friend or family member who's willing to cosign for you. A cosigner's good credit can minimize the lender's perception of you as a potential liability. However, it can be difficult to convince someone to act as a cosigner because if you fall behind on payments, he or she will be financially liable for your default. It would be best if you had a plan in place regarding what you will do if you fall behind on payments and discuss the terms with your cosigner. Though limited, there are options available for the home buyer with bad credit. However, it may be more advantageous to repair your credit before trying to purchase a home. A reputable credit repair company may be able to help.
Guest Post by CreditRepair.comOwning a home is a central part of the American — and so are mortgages. According to Zillow, the average home in the United States is listed at $250,000. There aren't many house shoppers who have that kind of cash to purchase a home outright. Home loans help millions of people realize their dreams of homeownership. While mortgages have been around for decades, the way borrowers apply for these loans have changed in recent years.Banks have long been the go-to choice for obtaining mortgages. However, the loan industry has changed dramatically since the late-1990s dot-com boom. Online lenders have emerged as an alternative for securing home loans. Applying for mortgages online has grown in popularity, especially among millennials.There's no arguing that online mortgage companies make the loan process much easier. Nevertheless, the question remains whether applying online is the best option for every applicant. The fact is that online mortgages have advantages and disadvantages. Is it right for you? The answer often depends on your personal preference and financial profile. Pros of applying for an online mortgage Our consumer-based society prefers getting goods and services as quickly as possible. Web-based mortgage firms satisfy this demand within the marketplace. They offer the speed and convenience that's often lacking among traditional lending institutions. Here’s a deeper look into the advantages of applying for a mortgage online: Lower rates and fees: Interested in saving hundreds or thousands of dollars over the course of your loan? If so, consider internet-based lenders. These providers have lower overhead than physical banking institutions. Because of this, they have lower interest rates, fees, and closing costs. This allows customers to keep more of their hard-earned money. Fast application process: Applying for mortgages with a brick-and-mortar banking institution can take several days or weeks. This is not the case with online lenders, such as Quicken Loans, which uses digital tools to expedite the application process. For example, you can photograph and submit your W-2s, application, driver's license and other documentation via your smartphone. In the case of Quicken Loan's Rocket Mortgage, the loan application may be completed in as little as eight minutes. If you prefer an internet-based approach that streamlines the application process, then online lenders are a solid choice. More options: Conventional lenders might not offer government-backed loans, and conventional loans often require a higher credit score and more money down. Online mortgage lenders may offer more types of loans, and you don't need the best credit score to get approved. However, applicants with lower credit scores often pay higher interest rates and penalties. Cons of online mortgage applications Online mortgage lending comes with its share of shortcomings and risks. The more you know upfront, the better chance you have of determining whether going digital with a mortgage loan is best for you. As a potential borrower, there are things you must be aware of before starting the application process: Limited customer service: Banks, credit unions, and other traditional lenders allow borrowers to meet with loan officers face to face or talk with them on the phone. Although online lenders have a few loan officers on staff, they might not be as accessible. Lack of specialists: Online lenders are national companies and might not have specialists on staff who have in-depth knowledge of local housing markets. The problem with this is that you may miss out on several homebuyer incentives that are available in your local community. For instance, there are programs that can help homebuyers lower their closing costs and interest rates. Mortgage scams: The universal warning for consumers is "if it's too good to be true, it probably is." These are wise words to remember when considering applying for a mortgage online. Since the growth of online lending, predatory lenders have been on the rise as well. These companies may "offer" loans that seem too good to be true, such as touting unbelievably low interest rates. But really, they’re trying to collect your “prepayment” or pushing you to get a new mortgage or refinance so they can collect fees. Do your due diligence and research lenders. Conduct an internet search and/or check to see if the lender is listed with the Better Business Bureau. Taking these kinds of steps can prevent you from being a victim of predatory lenders and even identity theft. When applying for a mortgage online isn’t a good option There are borrowers who aren't well-suited for online mortgage lending. It's usually better that they work with mortgage brokers, banks or homebuilder lenders. These applicants include the following: Self-employed applicants who may have a more complex financial situation and won’t benefit from a streamlined service Customers who have multiple accounts with one bank and seek an adjustable-rate mortgage A borrower who desires an easy loan even if it costs more When applying for a mortgage online is a good option Online mortgages are an optimal choice for specific borrowers. If you fall into any of the categories below, you may find that applying online for a home loan is more suitable than working with a traditional lender. An online lender is recommended for borrowers who meet any of the following criteria: Repeat home shopper Rate-and-term refinance customer Easy access to financial documents Long-term employment with one company Excellent credit Financially savvy Online mortgage lenders have an upside and a downside. Take inventory of your financial needs and comfort level before submitting a loan application. One thing that is for sure is your credit score plays a vital role in your ability to secure a loan with favorable terms.