Bad Credit? You Can Get a Mortgage Loan

Have you dreamed of owning a home, but fear that a bad credit history will keep you from realizing your goal? A bad credit history can be overcome for those willing to commit to discipline and research. Here are some tips to make your dreams come true.

Give credit to your credit score

Your credit score is key to obtaining a loan. If you have a high score, you're likely to be approved and receive a favorable interest rate. If your score is low, the opposite is true. Not only will it be more difficult to get loan approval, if you do, the interest rate will probably be higher. There are ways, however, to jump over the hurdle of a low credit score.

Sub-Prime Mortgage Loans

A bad credit score does not doom you to failure. There's a special category of mortgage lenders who specialize in making high-risk loans to those with no credit, little credit, or bad credit. These lenders are called sub-prime lenders, or non-conforming lenders.

Depending on the credit issues involved, the lender will "grade" your credit, and assign you a letter score, with "A" being exemplary credit, and "C" or "D" meaning serious credit problems.

Even if you receive a poor grade, you don't have to accept the first lender who's willing to grant you a loan. Since competition within the sub-prime market is intense, the option exists to carefully compare rates and find the most attractive one possible.

Financing Options to Consider

If you're in better financial shape now than when your credit problems occurred, you may want to consider an adjustable-rate mortgage (ARM). With an ARM, you can get a lower interest rate for a short period of time, usually about two to five years. However, with a history of poor payment, there may be a prepayment penalty that equals six months of interest.

If you keep up your payments, you'll prove to the lender that your credit habits have changed for the better. Then, you can refinance when the initial period has passed.

This isn't a wise option to consider, however, if you see possible financial problems looming ahead. If this is the case, you'll want to go with a fixed-rate mortgage so that your financial obligation remains constant from month-to-month. Don't let your less-than-sterling credit make you give up before you start. You do have options. Research your choices and do some homework. But most importantly, never lose sight of your dream of owning your very own home.

By Steven Powers