Information you need to know to get a mortgage loan for bad credit
Obtaining a mortgage loan for bad credit can be a challenge.
If you have bad credit, or even just a few slow payments, getting any loan is difficult, but a mortgage or equity loan can be double the trouble.
However, there are certain steps that you can take BEFORE and DURING applying for a home loan purchase mortgage, second mortgage, or refinance loan, which can dramatically improve your chances of getting approved.
Know Your Credit Score
First and foremost, you have to know the status of your credit. This step cannot be overlooked when applying for a mortgage loan for bad credit. It is therefore very important to get a copy of your credit report as soon as possible.
I would even go so far as to recommend monitoring it on a monthly basis. You may correct an error one month and it can be right back on there the following month. Many companies offer both credit scoring and monitoring service as well as advice on how to read it and what it means. This is money very well spent, and it is simply a step that cannot be overlooked.
I want to point out that this step is not going to save you money. The mortgage company still has to pull their own credit report even though you can provide them with your copy. However, it is very important that you know what your credit report shows so that when you're shopping around for a mortgage, you can speak intelligently to the loan officer.
I have an entire page on how the credit reporting system works and what you can do to improve your score. So for now, suffice it to say that you need to know what your credit report says so that if there are any inaccuracies, you can get them corrected. If your credit is really in rough shape, you will also probably want to consider investing in a credit repair kit($40-$150) or get help from a professional company that specializes in improving people's credit score.
Sometimes, if you know that you've had credit issues in the past, it may not even seem worth the trouble to complete a mortgage application. My recommendation is don't. Call me directly instead. I can take some basic information over the phone and usually have a fairly good idea as to what I can do for you. If you do happen to reach my voice mail because I'm on another line or in an appointment, please leave me a message with the best time to return your call. You can also send me an e-mail as well. I will do everything within my power to contact you at the appointed time or as soon as possible. My contact information is at the bottom of this page. Please do not think that just because you need to leave a message that I am too busy to talk to you. I make my living by talking with people who have all sorts of credit and financial issues and I want to hear from you.
However, if it happens to be the middle of the night or you can't call and would prefer to send me your information, you can do so by clicking the link below and completing the application form.
If you do complete the application on-line, you can also send me an e-mail to explain your situation. If you do so, please fell free to make it as long as you need to. I've always believed that it's best to know your entire situation upfront. This way I know what I have to work with.
Credit Repair may Help
One option that I never used to advise my customers of to improve their credit was credit repair companies. I used to say the only way to improve bad credit was to start paying your bills on time and to do what you can to settle old debts. While this is true to a certain degree, it's not always the most realistic. Credit repair companies have come a long way in the last few years.
I now am a strong proponent of CERTAIN credit repair companies. I word it that way because I know that there are still many credit repair companies out there that exist for one reason only, to take your money.
If you already own your home and need a mortgage loan for bad credit to consolidate debt, you can click one of the link below.
Have Some Money in the Bank
Another method that will help you to get qualified for a mortgage loan for bad credit is to have as much money in your bank accounts as possible on the day that your bank sends you your statement. It does not need to be thousands of dollars, but underwriters like to see some money in people's accounts, especially if they have had credit problems in the past. This shows that the problem is most likely behind them and they have resolved the problems that caused the slow credit in the firs place. It's even better if you can do this for two months in a row. For example, if your statements are mailed on the 20th of the month and you get paid on the 15th, don't mail out your bills until about the 18th or 19th. A day or two is not going to make much difference to the credit card company and showing a closing balance of $2000 is so much better than a balance of $4.35. However, do not allow your bills to fall behind and report slow on the credit bureau just so you can show a few extra dollars in the bank.
Another note on this is that if you had a bad month and bounced a few checks (or more), wait until that statement is two months old before applying. Underwriters won't typically ask for more than the last month or two of your bank statements.
Obviously, if you are currently behind by three or four or more months on your bills, this can have a negative effect. The underwriter will wonder why you're not paying your bills if you have all this money in the bank. So do what you can to get caught up to where you're no more than 30 days late if at all possible.
Be Prepared When You Start to Shop for a Mortgage Loan for Bad Credit
One other note that may seem a bit ridiculous but is very essential for a smooth loan process is to have your paper work in order and available when you start calling around. I know it sounds silly and hearing me tell you this may give you flashbacks to when your mother harped on you to clean up your room, but in my 16 years of experience, it's a simple thing that is very often overlooked. I often receive calls from people who don't know what company their mortgage is with or the balance of their mortgage or even what bills they owe. All they know is that interest rates are low and they want to refinance at a lower rate, even though they may not know what the interest rate is on their existing loan!
Now how on earth am I going to help someone like this?
Document Your Situation
The one item that is not part of the checklist that I am positive that you will need if you're applying for a mortgage loan for bad credit is to document your situation.
When an underwriter approves a loan, he or she is placing his or her stamp of approval on that file. If you default, this can reflect negatively on the underwriter. They don't want that any more than you want to lose your home.
So do what you can to make it easy for an underwriter to say yes at a reasonable interest rate. Be prepared to clearly explain your situation and show why this loan will be paid on time.
The items that we've discussed so far show you how to prepare for the mortgage application. But in addition, you want to make sure you're dealing with the right person and the right company. If you're someone who plans on applying for a mortgage loan for bad credit, you want to make sure that you "INTERVIEW" the person that will be handling your file and be sure that he or she is a fit for you. Do they answer all of your questions with a patient and polite attitude? How long have they been in the mortgage business? How much experience do they have in working with people applying for a bad credit mortgage loan?
Do you feel comfortable talking to them about your specific situation? This last question is very important because you need to be very forthcoming and upfront about your credit problems from the beginning. In trying to get someone approved for a bad credit mortgage loan, whether for a purchase or refinance, the loan officer or mortgage broker must know what he or she is dealing with from the start. If you are 90 days late on your mortgage, or have any other credit issues, tell them up front, and be prepared to explain why. Unfortunately, when applying for a mortgage loan, you cannot hide bad credit.
One alternative option may be to consider NOT TO GET A LOAN AT ALL. What do I mean by this? One creative way to purchase a home, especially if you have very little down payment and/or poor credit is to consider a Lease Purchase Contract. This is a way to purchase a home without actually committing yourself to it right away. It gives you time to build up a down payment if you need to and allows you to improve your credit so you can get qualified for a standard home mortgage loan. The credit qualifications are typically much less stringent than most loan programs and most of the time, you can negotiate a portion of the rent be applied to the down payment when you do actually purchase the home. There are quite a few benefits to this program, and I don't feel that I'd be doing you justice if I didn't recommend that you at least take a look at this option. Read: How To Get Cheap Mortgage Rates Or Payments
Also, you should be aware that not all loan officers and mortgage brokers stay in contact with you throughout the entire process. Tell the person you're dealing with that you want to be contacted as soon as they receive the initial loan approval, regardless of the outcome. I make it a point to contact my customers the moment that I receive the mortgage approval to let them know all is OK, or if there is a problem, what we can do about it. The bottom line is to do what you can to stay as informed as possible from the beginning of the mortgage application until the closing.
Get Legal Advice
Last, but certainly not least, I strongly, strongly suggest that you have your closing papers reviewed by a competent real estate attorney. And I'm not talking about your cousin in another state that is a public defender. I have seen so many people who have applied for a bad credit mortgage loan get treated unfairly. It seems that because of the bad credit situation that they feel they have to take whatever is offered. This is simply not always the case. You need someone who is knowledgeable in real estate law to review your documents BEFORE you sign them and inform you when things aren't right. A good real estate attorney can be the answer. The two main forms that you want reviewed are the "note" and the "HUD statement", sometimes called the "settlement statement". The note explains the terms of the loan and the HUD shows all the figures.
These two forms are so important because there is so much legal jargon on the note, it can confuse even the sharpest of us if we are not familiar with it. And the HUD has so many numbers that are going to so many different people and companies that it can make your head spin. I once called someone who had just closed on a refinance loan and he paid $8,800 in origination fees for a $110,000 loan! Luckily, he was still in the rescission period,(see definitions page for explanation), and was able to cancel the loan. I was able to refinance the loan for a lower amount, at a lower rate, with lower closing costs and get him more cash out.
The reason he almost paid so much is just because he didn't know any different. He thought that just because he was getting a mortgage loan for bad credit that he had to take what was offered. I've also seen people who had no idea that they had a pre-payment penalty, or what the terms of their ARM were, all because they needed the loan and didn't do their homework to find a better loan.
The act of getting an attorney to review your mortgage loan documents may cost $200-$300 up front, but in the long run, it can save you ten times that amount. Also, what is peace-of-mind worth when you're dealing with the financing the biggest purchase of your life?
However, there is an alternative to paying $200-$300 per hour for a real estate attorney to review your documents. What if I told you that for the same cost of an hour or two of a typical attorney's time, you could get a full year worth of consultation and advice for your whole family? Not only that, but it would also provide for a will to protect your family as well as letters written on your behalf, traffic court representation, law suit protection and even IRS Audit protection, all for less than a cup of coffee per day. (And I'm not talking about Starbuck's either).
As always, please feel free to contact me with ANY questions you may have about the mortgage process.