Guide to Bad Credit Home Financing

If you’re looking for bad credit home financing, we first suggest reading our page how to buy a home with bad credit. Here we’ve touched on some of the basic preparation involved in purchasing a home with bad credit, such as making attempts to improve credit first, then getting your down payment in order. To give an idea of why this is important let’s look at an example.

A person with good credit can qualify for a $100,000 mortgage at 5.25% for a 30-year fixed rate home loan; their payment would be $552.20 per month. A bad credit home financing loan to someone with a FICO Score 500-540 would increase the rate +3.425%. This means the borrower will be paying 8.675% interest. This brings the monthly payment to $781.35, meaning the payment has increased by $229.15 and over the course of the loan they’ll be repaying $82,494 more than someone with good credit.

As you can see, bad credit home financing can be quite expensive. The other factor involved is the large down payment required with a bad credit home loan. If this same down payment could be made to fix your credit, it probably makes sense to do that first, then wait to purchase a home once the credit is again in good shape. Paying off creditors or paying down your debt for approximately a year prior to purchasing a house will significantly increase your chances of being approved for a loan and will get you a better interest rate.

Once you’ve made your credit report look as attractive as you can, it’s time to shop around for the best terms and interest rates with various mortgage lenders. You’ll first want to at least attempt getting a prime interest loan using letters of explanation to explain any negative entries on your credit report. If this fails you’ll then need to start searching sub-prime lenders who deal more frequently with bad credit home financing. Most sub-prime lenders do not readily identify themselves as such. The best way to find a lender dealing with bad credit home loans is to look at their interest rates. If their published rates are higher than average, this is a good indicator that they are likely a sub-prime lender.

One other item to consider when shopping for bad credit home financing is to use a professional mortgage broker who specializes in dealing with bad credit loans. You do want to be careful here as in the sub-prime market many of these brokers will take advantage of clients charging a higher mark-up than they would a client with good credit. Even with this considered, it still can be a good option, if you’re able to find a broker who gets you the rate you desire.

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