Bad Credit and What It Means For Your Mortgage

When you apply for your mortgage, a favorable credit rating is one of the most effective bargaining tools you can have. But what if your credit is bad? Many mortgage experts say that if you do not have good credit, applying for a mortgage is a waste of time. Therefore, if you have bad credit, many ask themselves what this means for their mortgage.

What is a Bad Credit Rating?

Your credit rating is a number that reflects how much credit you have, how much you have used, your employment history, and your debt repayment history. Your credit score is a number between three hundred and eight hundred and fifty, with eight hundred and fifty being the best score you can have. Most lenders prefer their clients to have a credit rating of at least seven hundred. Anything less than that and lenders tend to view mortgage applicants as to much of a risk. The lower your credit score is, the more it reflects factors that they consider undesirable, such as delinquent debts or an insubstantial work history. Below six hundred and twenty, and it is difficult to get an affordable mortgage. If your credit score is five hundred or less, it is likely you will be unable to find a lender willing to give you a mortgage at all.

Getting a Mortgage with Bad Credit

Having bad credit does not mean you can not get a mortgage, but it does mean that getting a mortgage might not be a good idea. Your credit rating is not the only criteria lenders judge your mortgage application on, but when you have bad credit, lenders feel that you are not a good risk, as compared to someone with a good rating. If you have bad credit they might still be willing to lend you money for a mortgage, but it will be what is known as a sub-prime mortgage, which means that the interest rate is higher than normal.

Typically, your interest rate will be between two and five percent higher if you have a bad credit rating, which can add a significant chunk of interest to your loan. If your credit rating is low due to poor finances, the extra interest could seriously affect your ability to repay your mortgage.

Another issue is that conventional lenders, including banks, usually prefer not to issue mortgages to people with bad credit. This then means you must look elsewhere, and you are then faced with the possibility of unknowingly coming into contact with a predatory lender. If you do get a bad credit mortgage it is very important to choose your lender carefully.

How to Repair Bad Credit

If you are contemplating getting a bad credit mortgage, it is worthwhile to stop and think about whether it might be better to put it off and repair your credit instead. By doing this, your improved credit score will eventually allow you to get a mortgage with a conventional interest rate. It is important to be patient with this method, as it generally takes at least six months, and up to a full year, before you can expect to see any improvement in your credit rating that is significant enough to allow you to get a mortgage. This is especially true if your current score is under six hundred, since you need a score of at least seven hundred and twenty or higher to be in the zone that will make lenders comfortable enough to lend you money.

To repair your credit, you must first obtain a copy of your credit report and check it for errors. To do this, just request a copy of your report from companies such as Equifax, Experian, or TransUnion, the three main credit reporting agencies. Next, check for errors. Look carefully for entries that are out-of-date or incorrect, such as entries for delinquent repayments that you actually made. This is an important first step, as even one error can have a significant effect on your credit score.

Fixing the error is usually a simple matter. You can call the creditor who reported the error, and let them know that a mistake was made. Explain why you want the item taken off your credit report. If they agree, ask them to mail you a letter to verify the removal, so you can give the credit bureau some proof.

The second step in repairing bad credit is to manage your current debts. Make sure all your debts, including utility bills, credit card balances, and loan repayments, are paid on time. Keep your total debt as low as possible, while maintaining some available credit. If you decide to close some credit card accounts, keep the oldest accounts open preferentially, as lenders prefer clients to have a long credit history.