As you start shopping for a bad credit home loan you'll quickly find that you have more mortgage choices than you had expected. Before you decide, use this self-interview to make sure you are on the right track.
The Pitfalls of a Bad Credit Mortgage
In today's real estate market we aren't seeing the kind of home appreciation so many of us enjoyed just a few short years ago. As a result, bad credit borrowers can't count on appreciation to bail them out if times get tight. Take the time to carefully consider your financial situation before making your choice on a bad credit home loan.
Ask Yourself...
If I choose an adjustable rate mortgage, will I be able to improve my credit score enough to refinance into a conventional mortgage before the rate adjusts? And if not, will I be able to afford worst case scenario rate adjustments?
Are there any other debts in my near future that could affect my debt-to-income? Car loans, college tuition, or student loans that could change my financial situation?
How long will I stay in this home? Is it worth the expense of originating a mortgage loan, risking prepayment penalties when I'm ready to sell, and the commissions and other expenses I'll be paying if I only plan to own it for a short time?
How risky is my financial situation? Is my job secure, do I have medical insurance, do I have at least two month's of living expenses saved (six months if self-employed or on commission)?
Bad Credit Mortgages: Don't Rush In
Especially for borrowers with bad credit looking at subprime loans, it pays to shop. These loans are often evaluated on a case-by-case basis and rates and fees can vary widely. Never plan to keep a bad credit mortgage longer than two to three years, and don't accept one with a prepayment penalty that exceeds the fixed rate period. For example, if it's a 2/28, don't take a loan with a 5 year prepayment penalty. If your credit is only marginally bad, check with a reputable consumer credit or HUD counselor, or a loan officer who really knows FHA, Fannie Mae, and Freddie Mac products. You may be able to get a decent loan now, or at least get a plan in place for getting conventional financing by holding off a while and cleaning up your credit.
Mortgage Credit Problems Columnist
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