Can A Borrower With Bad Credit Get A Home Loan?

Home loans for those with bad credit are called by a variety of names including sub prime market; B, C, and D credit lending; or bad credit loans. While such loans exist for those with bad credit, those with less than perfect credit who are considering buying a house need to know the terms they will receive are not like the terms those with perfect credit will receive. And some people may even be wrongly assuming their credit is worse than it actually is.

"The first thing a borrower should do is consult with the lender to determine how a borrower considers his credit," explains Doug Perry, who has worked in the Consumer Markets Division for Countrywide Home Loans for sixteen years. "I've worked with borrowers who described their credit as bad from a lending standpoint. Their credit is fine to get a home loan. I have borrowers that describe their credit as fine, and the opposite is true. It is not ideal for lending purposes, so they really need to take advantage of that opportunity. Consult with an expert, such as Countrywide, with no cost or obligation, to get your questions answered, or to try qualifying for a loan."

If you are considering trying to obtain a home loan and you have bad credit, you should know that lenders categorize credit using two systems and that humans evaluate credit reports when deciding whether to give a loan. As a result, different lenders might assign different grades to the same borrower, and different lenders might assign more or less importance to certain bits of negative information in a credit report.

Under the first rating system, the credit of potential borrowers will be evaluated and given a grade. Those who receive an A are considered to have the best credit. Those who receive a B have a few problems. Those who receive a C have fairly bad credit. Those who receive a D have very bad credit, and some potential lenders even receive an F.

Under another type of scoring, potential borrowers are rated on a system similar to a SAT score, with 800 being almost perfect and 400 being as low as possible. The scores may receive such names as FICO, Beacon, or Empirica. Each of those names corresponds to a particular major credit company, and only the credit companies know the formulas used to determine such scores. A bad grade under this scoring system can lead to a bad letter grade under the other scoring system.

No matter what your score, however, it might be possible for you to obtain a home loan.

"The consumer should be working with the lender that has more options," Perry says. "At Countrywide Home Loans, we have subsidiary full spectrum lending that makes lending opportunities available to virtually all credit profiles."

You should know that if you have bad credit and apply for a home loan, a larger down payment may be required. The down payment you will have to make may range from 3% to 5%. It might be possible to borrow the money for a down payment from a friend or relative, although some lending companies do not allow that. It might be possible to repay your friend or relative by getting a second or third mortgage, once your home is financed. Another option might be a down payment assistance program.

It also always helps to try to improve your credit by paying your bills on time and obtaining a major credit card, if you do not have one. Again, an expert on home loans can help you.

"Let us take a look at your credit, because analyzing credit is complex," Perry explained. "It is something that is individual to the type of loan that a borrower is obtaining. It is different for a home loan versus an auto loan versus a personal loan."

When a lending institution decides whether or not to grant a bad credit home loan, various factors will be considered, such as loan-to-value ratio, monthly income, and debt-to-income ratio. Don't forget, negotiation might be possible, so don't hesitate to ask for better terms.

When calculating the debt-to-income ratio, a potential lender will add together all your debt payments, including the potential home loan, any auto loans, consumer debt, and credit cards. That number will be divided by the net cash available each month to the potential borrower for living expenses and debt. Most lenders would like the number obtained from the formula to be 40% or less, and some kind of loans require that. Some lenders would allow a number as high as 55% to 60%, however.

Lenders use the loan-to-value ratio to calculate the amount being borrowed and the amount placed as collateral. For example, if you were to obtain an 80% LTV loan on a $120,000 house, you would obtain a loan of $96,000.

If you want to see your credit history from all three major credit reporting agencies, you can obtain the information online from Transunion, Equifax, and Experian.

If you have bad credit, you may expect to be charged more points and to pay higher interest rates in obtaining a home loan than those who have good credit.