Bad Credit and Home Financing
A bad credit rating is a serious disadvantage for almost anyone, as it affects a person's ability to operate in the world in so many different ways. Everyday financial transactions that most people take for granted, like using a credit card or writing a check, are often precluded for those with a bad credit record. If cash is not available, major purchases, like buying a new home, seem to be impossible.
In the financial world, however, most things are possible if one is willing to take the time and make the effort needed to be informed about what is available. Conventional routes may well be closed, but financing is still available from other sources. The cost of financing from alternate sources may be higher, and in some cases prohibitive, but because home ownership is such a powerful investment, all legitimate means of purchasing should be considered.
Individual purchasers need to examine their own situation very carefully. People with chronic money problems should probably avoid borrowing more money under any circumstances, but if a bad credit rating has resulted from one careless investment or from a single business transaction that went wrong, all may not be lost. It may be difficult to erase the record, but by careful planning, similar mistakes can be avoided in the future.
One recent survey estimates that up to 25% of homes in the United States are financed through sub-prime lenders. A bad credit rating may place a person in the high-risk category, but financial support may still be found through these lenders (though now it may be more difficult). By shopping around, it is possible to find competitive rates and fees.
The wide range of choices typically offered by banks and other mortgage holders are usually not available to anyone with a bad credit record, but people in this position can still take steps to improve their situation. They should begin by checking their credit history and being aware of their recorded credit score. If the information is incorrect, it can be changed and updated, and this alone could make a significant difference to what financial arrangements are possible.
Most mortgage applicants who are showing a poor credit rating will be required to make a substantial down payment on the property they wish to purchase. A credit score of 600 or less normally requires up to 20% down payment, so applicants need to be prepared for this. Regardless of this requirement, however, home purchasers should make the largest down payment possible anyway, not only to lower monthly payments, but to save the cost of mandatory insurance on the amount of money borrowed. Although insurance is normally a good idea, with a 25% down payment on the property, the Private Mortgage Insurance premium is optional, saving as much as $100 per month or more.
A poor credit rating can also affect the way one goes about purchasing a home. Most people start by checking out desirable neighborhoods, properties advertised for sale, and real estate publications. A bad credit history, however, forces the potential purchaser to do things in reverse. They must start by checking out the financing, terms, and conditions that are available to them. Once they have negotiated a pre-approved mortgage with monthly payments they can afford, they can then seek a property within that price range.
Erasing a bad credit record is not easy, and sometimes it is necessary to make the best of a bad situation. But investment in a new home can be enormously beneficial to a person's future financial health.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.