Buyers with bad credit are going to have to jump through a lot more hoops than ones with good credit. After the recent housing bubble and mortgage crisis, banks are very hesitant to lend money to anyone who they think won’t be able to pay back their mortgage. For this reason, many banks have shut down their sub-prime lending programs, making it more difficult to find a mortgage if you have bad credit.
Finding a mortgage will be hard
If you are able to find a mortgage, then you need to be aware that you’re probably going to pay a lot more in interest. Banks have to account for their risk in these loans, and charging more interest is one way to make up for the higher default rate.
You’ll pay more in interest
In order to reduce their risk, banks will also ask for a large down payment. Expect to pay anywhere from ten to thirty percent of the price of the home. Of course, that means that you might have to save for a lot longer period of time. Another option might be to pay for private mortgage insurance. This is a policy that pays the bank in the event that you default on the mortgage (you won’t see any of the money if this happens).
You’re going to need a bigger down payment
Bad credit means that you may have to pay more for credit counseling before taking out your mortgage. There might also be higher fees for processing the mortgage. Fortunately, this practice is being banned in many states, so it isn’t as big of a problem as it used to be.
Expect to pay more in fees
Between paying for PMI and dealing with a higher interest rate, you’re going to have less money to buy a house with. Because the bank will base your maximum affordable payment on your income, the interest rate and PMI could reduce your purchasing power by tens of thousands of dollars. That could mean lowering your expectations about what you can buy.
You’ll have less purchasing power
There are a lot of lenders out there that search out buyers with bad credit in order to get as much money as possible out of them. These lenders know that it can be hard to find a mortgage, and they entice buyers with promises that they can make the whole process very easy. To avoid these traps, look carefully at the terms of any loan, and carefully compare fees as you get different loan offers. Also make sure that any promises the loan officer makes to you are in writing.
You’re going to find some bad lenders
Because of all of the hurdles that a buyer with bad credit has to go through, realtors will be hesitant to work with you. While it probably won’t be a problem in most markets to find someone to show you houses and walk you through the process of getting a mortgage, if you’re trying to buy in a very dynamic market (i.e., a place where real estate prices are rising very rapidly), then it just won’t make sense for a realtor to spend a lot of time showing you houses that you probably won’t be able to buy.
It will be harder to get a realtor to work with you
With all of the negative consequences to buying a house with bad credit, many people are surprised to learn that there are ways to fix it. If your credit is bad because of mistakes you made several years ago, the easiest solution might be to just wait. Mistakes count less against your score over time, and many people who continue to pay their bills on time notice that their score increase every six months. If you have to save more money to make a down payment, then it might be a good idea to rent for just one more year before starting the application process. In the long run, you could save thousands of dollars in interest payments and qualify for a bigger amount to buy a home with.
It might not be so hard to fix your credit
If you do get a mortgage with bad credit, it’s important to know that qualifying for a credit card or other form of credit might be harder after you move in. This is because the new mortgage will count against you when potential lenders look at the total amount of debt you have. It’s important to note that mortgage debt isn’t as bad as other forms of debt, such as credit cards, but it may be harder to get a car loan or new credit card for a few months. After some time in which you pay all of your bills on time, you score should start to improve.