The Top 5 Things You Should Know About Bad Credit Home Loans
Over the years, credit has become an integral part of American society. That is why it is always important to keep good track of your credit in order to stay financially capable. On the other hand, not all of us are able to build up good credit.
Having bad credit can be quite tough, especially after recently experiencing bankruptcy or foreclosure. It can be even more challenging when you are on the verge of finding yourself a good home. There is no reason to fret though because having bad credit does not mean you can no longer obtain credit in the future.
It is a fact that getting a conforming loan can almost be impossible for people with bad credit. Even though the gestation period after being declared bankrupt is seven years, it remains visible on the credit report for at least another three years. If you cannot wait that long before you apply for that home loan, a bad credit home loan can be a good thing to do.
A bad credit home loan is a good option for people with poor or bad credit. However, there are some things that most bad credit home loan buyers don’t know. So, here is a list of the top five things you should know about bad credit loans.
1. You still have to qualify for a Bad Credit Home Loan
Most bad credit home loan buyers fail to realize that they still have to qualify for the loan before they could avail of it. Even though there are lenders who offer loans for people with bad credit, they still need some assurance that people will be able to make the payments. Therefore, if you are going to apply for a bad credit home loan, you will still have to prove some basic things.
First and foremost, if you want to qualify for a home loan with bad credit, you have to prove that you have a steady flow of income. Having a job with a consistent salary can be very helpful in getting your loan approved. It also helps to demonstrate that you have a regular savings pattern with an aim to save for at least a 10% down payment.
2. The interest rates are higher.
The rates offered by lenders for people with bad credit are definitely higher than those with good credit. Actually, this is true for all types of bad credit loans. Aside from the high interest rates, home buyers are also faced with things like earnest money, down payment, and closing costs.
The reason behind these high interest rates is that lenders need to be assured that they will get paid. Because the borrowers have bad credit, they will have a lot of risk when lending their money. With this in mind, it really helps if you improve on your credit score a little before applying for a home loan by settling some debts.
Subprime loans like bad credit home loans most likely have various penalties like a balloon payment penalty, pre-payment penalty, or penalties for both. If you pay your loan before the end of the term, then you are going to have to pay a pre-payment penalty. A penalty is incurred here basically because it most likely means that the property has been sold or refinanced by the borrower.
There are some terms in a bad credit loan that requires the borrower to pay a balloon payment, in which the borrower has to pay off an entire balance in a single lump sum after a specific period of time has passed by. If the borrower is unable to pay, then a balloon payment penalty is imposed which may force borrowers to sell, refinance, or even lose the property.
4. The FHA might help
If you are still having a lot of trouble finding a lender for your home because of your credit history, an FHA loan can help. FHA loans insure against default, which means the lenders are guaranteed that they will get paid even if the borrower fails to keep up with the payments. With the help of the FHA, lenders become more willing to approve loans for people with bad credit.
On the other hand, FHA loans can be quite limited. This is because borrowers would still have to pay a one percent mortgage insurance premium and then a monthly premium for a period of five years regardless of the equity of the property. Then again, for borrowers with bad credit, an FHA loan can still be of significant help.
5. Consolidated Loans
If you have multiple bad credit loans while you are looking for a new home, loan consolidation is one of the things you can consider. This is a great way to push through with your bad credit home loan without having to reset your finances. Consolidating loans means combining all your loans into a single debt with new payment terms in an organized way.
Consolidated loans usually have lower interest rates, making it a good choice for people with bad credit. However, there are also some risks involved. If you fail to keep up with the payments, you are more likely to have your home repossessed.
There are a number of ways in which buyers with poor credit can still avail of loans and other financing services. However, it is also important to take note that engaging into these bad credit home loans can put you in a lot of risk because of the terms and conditions applied. It is best to be careful in reviewing loan terms in order to avoid any inconveniences.
Getting a bad credit home loan can be a complicated thing. Sometimes it is better to avoid getting into such a situation in the first place by carefully monitoring your credit rating. Simply because good credit can get you the best offers in town, it is important to make sure your credit is not going in the wrong direction.
Credit monitoring can help you set things straight as it can help you make the right financial choices. When you monitor your credit, you can quickly know whether or not a certain transaction can damage your credit rating, especially if it is a home purchase. On the plus side, it actually saves you a lot of money.
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