When Is It Recommended to Get a Bad Credit Loan?
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If you have bad credit, you will need to start rebuilding it at some point in order to increase your score. As such, a bad credit mortgage may just give you the leeway you need not only to buy your dream home, but also to improve your credit. Here is how these home loans work.
Getting a Poor Credit Mortgage
If you have bad credit, then chances are good that you will need to search a bit before you find a lender that will work with you. Most banks do not lend such large sums of money to individuals with damaged credit, so you will need to seek private lenders or perhaps even your credit union if you have an outstanding employment and income history. Expect to come up with a significant down payment – usually 10% to 20% of the overall value of the loan – and expect to pay above-average interest rates of about 18% for a while.
Getting a Second Mortgage
Despite the high interest rates on a bad credit mortgage, you are not stuck with them forever. In fact, if you are careful to make all of your mortgage payments on time for a year or two, you can actually refinance your loan and get a second mortgage with a lower interest rate. Second mortgages are common among individuals with bad credit who are trying to rebuild, and while you still may not qualify for subprime rates, which are usually around 4% to 5%, you can get rates as low as 7% to 8%. This lowers your mortgage payments and the total amount you will pay for your home after you have made all of the payments.
Should You Get a Bad Credit Mortgage?
Whether or not the time is right for you to get a bad credit mortgage depends on a few different factors. Some things that you should consider before you seek a lender include:
- Your work history. Oftentimes, private lenders and even credit unions rely on your work history rather than your credit score. As such, before you attempt to take out a home loan, you need to have a solid work history that includes the same employer for several years.
- Your down payment. Lenders will require you to put up at least 10% of the total value of the loan, but some may require as much as 20%.
- Your income. You need to be certain that you will be able to make your loan payments as promised. Defaulting on a mortgage can harm your credit even more, and it may make it impossible for you to get future loans.
- Your stability. Is your job stable? Are you likely to get fired or laid off any time soon? Is there a chance that the company may close its doors? If so, it may not be the best time to seek a poor credit mortgage.
Overall, while a poor credit mortgage is certainly advantageous for those who have less-than-perfect credit histories, it is still incredibly important to utilize them wisely. Over time, you can rebuild your credit and take out a second mortgage to get reduced interest rates and more affordable monthly payments.