Bad Credit

One of the most memorable moments in a person’s life is buying their first home, one of the biggest reasons that doesn’t happen or happens, but at a heftier price tag is “bad credit.”

Out of “bad credit” was born the Subprime loan program, which was put into place to help out those who have a financial picture that is considered by FICO standards to be bad credit. Subprime loans give the borrower the option of working around their bad credit instead of repairing it.

However improving or repairing your bad credit improves your chances of obtaining a home mortgage that is more reasonable and financially plausible for you as an aspiring homeowner.

Subprime Mortgages

Subprime borrowers are generally defined as not meeting Fannie Mae or Freddie Mac underwriting guidelines and therefore are considered or perceived as having a higher risk of loan default.

What Criteria Defines a Subprime Borrower?

• Reduced payment ability – This could be due to a low or sporadic income.
• Low credit score – Anything below 620
• High debt to income ratio – Anything greater than 45%

If this is the criteria that you currently fall into than you would be classified as a subprime candidate, and should be prepared to pay higher interest rates, and higher closing fees and costs.

Subprime Loan Types

1. Interest only payments – Borrower pays only the interest on the loan for a set term. When interest only payment term ends a balloon payment is due.
2. Option pay – Payment is decided upon by the borrower. Option payments can consist of minimum payments, interest-only or traditional full payments on loan.
3. Hybrid – This is a mortgage that starts out fixed for a limited term and then converts to an adjustable rate, which is generally higher, for the remainder of the loan term.

Hybrid terms:

2-28 (2 years fixed /28 years adjustable)
3-27 (3 years fixed / 27 years adjustable)
5-25 (5 years fixed / 25 years adjustable)

Benefits of a Subprime Loan:

Obtaining a subprime can get you into a home today without having to repair your bad credit as long as your FICO is at an acceptable 620 or above and your debt to income ratio doesn’t exceed 45%.

It will work with low income and bad credit

It can give you a tax break – 100% of interest on a home loan is tax deductible.

It encourages and rewards bad credit repair – If a subprime borrower maintains a good payment record for 2 to 3 years they should be able to refinance into traditional rates.

Qualifying for a Subprime Loan:

• Must have at credit score (FICO) above 620.
• Must have a source of sufficient income.
• Must have a credit history – Unfortunately a person with no credit or limited debt experience would not qualify for even this high interest loan program.
• No history of loan delinquency, default or a bankruptcy showing on your credit history – All these bad risks scenarios would disqualify you as a subprime borrower.

The last thing to know about a subprime loan is that not many, if any, of the larger banking institutions provide them anymore so your best avenue would be to go through lending centers (online research will help you find these) that specialize in this high risk type of lending.

Now that the picture is becoming a lot clearer as to why good credit versus bad credit can make a substantial difference it easier to see why, if time is on your side, improving a bad credit history might be a more attractive option to you as an aspiring homeowner.

Improving Your Bad Credit

Given that your credit is your calling card to a better home mortgage you should consider it beneficial to you to take the steps necessary to improve on your bad credit.

Can I repair my bad credit? – The answer to this is absolutely YES. Although repairing bad credit requires work it is a process that will reward you in the long run.

Important Steps To Repairing Bad Credit:

1. Obtain your credit report – Three agencies have your credit history (EQUIFAX, TRANSUNION and EXPERIAN) or you can go online to AnnualCreditReport.com and they have access to all 3 of your credit reports.
2. Understand your credit report – The key item that affects a credit report and leads to bad credit is late payments and bankruptcy. Every late payment of 30+ days will show up on your credit report and will remain there for up to 7 years. A chapter 7 or 11 bankruptcy will remain on your report for 13 years and a chapter 13 for 10 years.
3. There is unfortunately not a lot you can do for legitimate bad credit, so what you will be looking for are the mistakes and any charges of a suspicious nature (example: you’ve never had a credit card from a particular store listed on there).
4. Once you’ve identified the questionable charges it is up to you to dispute them.

Disputing Questionable Payments:

1. It is possible to dispute payments you believe to be suspicious, incorrect or out dated.
2. Make a copy of your current report and highlight or circle the items you are disputing.
3. Write a letter explaining why you disputing the late payments (state whether you believe them to be out dated, incorrect or credit not obtained by you)
4. Attach a copy of your credit report to the letter and send to the three credit agencies (EQUIFAX, TRANSUNION and EXPERIAN). It is important to note that one is not obligated to report your dispute to another, so it’s up to you to cover all your bases. Make sure to send the letter certified in case proof of your actions is required later.
5. Should the reporting agencies fail to help you your next step would be to go to the actual creditors. Make sure to send the dispute letter to their billing address and not the address listed on your credit report.
6. Once you’ve cleared up any inconsistencies on your credit report the most vital thing is to establish a good payment history going forward and keep an eye on your credit report to keep the mistakes at a minimum and the fraudulent charges from causing you any future credit damage.

So the next time around the choice won’t have to be a “bad credit” mortgage versus repairing your bad credit, but instead will be which low interest, fixed rate loan you can refinance your dream home with.