Acquiring a home loan is a very serious responsibility and involves big risks. The risk gets even bigger with bad credit home loans. Obviously, home loans for bad credit require higher rates than mortgages offered to those with excellent credit. For this reason, anyone who plans on getting a bad credit home loan must take all the necessary precautions before signing up for a loan. Here are the 7 biggest mistakes one can commit when applying for a bad credit mortgage.
Not taking the time to shop around. True, many lenders offer home loans for people with bad credit but not all of them give the best deals. What may seem like the best deal offer may turn out to be not good at all. To compare lenders more accurately, be sure to check the APR of the loan as this includes the interest rates plus other fees associated with a loan.
Not preparing your credit report. The status of your credit history will play a huge role in the rates you'll get. Obviously, the better your credit score is, the better your home loan rates will be. Check your credit report and see if you can make some improvement in your credit rating before applying for your home loan.
Not getting a pre-approval. Getting pre-approved is free and easy. More importantly, it enables you to set a realistic budget for the home you will purchase. It will also save you time trying to check on houses that do not really fit your budget.
Taking out a loan that you can't afford. It's easy to get a bigger loan so you can buy the home of your dreams but the more important question is, can you really afford your monthly mortgage? Don't forget that your home loan won't be the only cosy you'll be dealing with. Be realistic and ask yourself, can you really keep up with your payments all throughout your loan's term?
Looking at houses that are way out your budget. Sometimes, you may be offered an expensive house with attractively low monthly payments. Watch out! Even if your mortgage starts with a low rate, you may be surprised to find that after only a month or two, the interest rate on your loan can double up or increase three or more times than what you expected.
Not checking the cost of your prepayment penalty. A prepayment penalty is the cost charged when the borrower tries to pay off his mortgage in advance. If you're not careful, you may be surprised to learn that the prepayment penalty will cost you thousands of dollars. The best mortgage you can find is one that doesn't have a prepayment penalty.
Taking out a home equity loan against your first mortgage. It is recommended to pay at least 20% down payment of your loan but if you don't have that cash, you'll be required to buy the PMI or the Private Mortgage Insurance. Some brokers recommend getting a second mortgage to avoid paying the PMI but with the interest rates ever increasing, you're actually better off paying the PMI and sticking with just one loan.
by Liz Roberts
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