Bad Credit Home Loans

Bad credit home loans make the American dream of buying and living in your own home a reality. Borrowers with bad credit should not shy away from the lending process immediately without taking the time to explore their available options. For one, there are several options for borrowers with bad credit to receive a home loan. Secondly, borrowing money to buy a home is a great way to improve your finances, and also improve your credit score for the future.

Bad credit home loans
Borrowers who have bad credit are still able to borrow money necessary to buy a home. Read through the following guidelines for bad credit loans to see if these circumstances apply to you:

Bankruptcy – Bankruptcy is the surest way to watch your credit score fall into bad credit territory. Those who want to borrow money to buy a home should realize that bankruptcies stay on your credit report for 7 years, and affect your score for as long as 10 years. However, with each passing year after your bankruptcy, the bankruptcy is far less important to your current credit score.

FHA Down Payments – The FHA is one of the best ways for borrowers to buy a home, even if they have bad credit. The FHA requires a down payment of only 3.5% of the current price of the home, meaning that a $200,000 house requires only $7,000 upfront. Keep in mind that FHA stands for the Federal Housing Authority, an entity which exists for the sole purposes of creating as many potential home buyers as possible.

Non-conforming loans – Loans that do not conform to the standard of the FHA (no money down, or jumbo sized loans) are very difficult to manage for those with bad credit. Without the FHA, the cost of insurance and other products is significantly more expensive. Also, banks are less interested in creating new non-conforming loans with prospects for the real estate market being less than perfect.

Hard money is expensive – The few lenders that will touch a no money down loan for subprime borrowers with bad credit are hard money lenders. Hard money lenders generally require a down payment of 25% or more, charge interest rates well into the double digits, and are a lender of last resort. Borrowers would be best to wait out their credit score before seeking a hard money loan.

Dealing with Bad Credit
In many cases, bad credit is a problem that is not entirely related to your own problems. In many other cases, a bad credit score can be fixed up in as little as 60 days, time enough to save you thousands of dollars on a high interest loan.

Bad credit from bankruptcies simply cannot be fixed; however, you can improve your credit score in other ways. The first step in cleaning up your credit report is to start paying down your existing loans. Seeing as your utilization of debt (the percentage of current debts vs. your credit lines) makes up the largest part of any individual piece of a credit score, paying down existing balances is an easy way to improve your score.

Before applying for any loan, always try to get your total utilization and per-account utilization to less than 30%. Thus, a $1000 credit card should have no more than a $300 balance. A combination of 5 credit cards worth $15,000 in credit lines should have a total balance of no more than $4,500. By keeping your utilization under 30%, you can improve your credit score by as much as 20-50 points.

There are 4 ranges for credit scores:

  • A FICO score of less than 500 means you’ll pay as much as 7% more in interest than a borrower with pristine credit.
  • A borrower with FICO score of 500-540 will pay a rate roughly 4% higher than a perfect borrower.
  • A bad credit home loan issued to a borrower with a credit score of 541-580 will pay anywhere from 2.5-3.5% more than someone with perfect credit history.
  • Finally, those with a credit score of 600-640 will pay only 1.5-2% more than someone with a perfect credit score.