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There are great mortgage loans for people with poor
credit, and yes, you can still save thousands of dollars.
In order to receive preferential treatment for mortgage
professionals, you’ll need a credit score of 680
or better (this is considered A credit). If you have
a score that is less than 600, you’ll fall into
a sub-prime loan category. Now, you'll need to get creative,
in order to get your mortgage and not lose a fortune.
A sub prime lender will offer you virtually any type
of loan that a conventional lender will offer, but you’ll
pay a much higher interest rate, as a risk premium.
In other words, these lenders consider people with low
credit scores risky borrowers, because they may have
some poor payment history. Lenders like people who pay
all their bills on time, even though it is not at all
uncommon for people to occasionally miss a payment for
one reason or another. So, the sub prime, or non-conforming,
or niche, lender says, “We’ll take the risk,
but we want to make a lot more money, in order to do
it.” Don't worry. You can get it done, and improve
your situation to refinance at a better rate later.
Let’s assume you have poor credit, and you want
to purchase a house for $100,000. You also have only
five percent to put toward a down payment. You bring
a twofold problem to the lender – poor credit and
a very high loan-to-value, or LTV. You need to borrow
$95,000 on a $100,000 home, so your LTV is 95%. As a
general rule, lenders like purchasers to bring 10 to
20 percent of their own money to the table, again lowering
the risk for the lender; they feel that the more money
a borrower has in a deal, the less likely she is to
default. So, your mortgage professional will find his
best sub-prime lender, and take your application to
him.
Now, if your debt-to-income ratio (amount you owe monthly
vs. gross income monthly) is 50% or less, and your credit
score is above 500, you’ll likely get your $95,000
loan. Your interest rate, however, will be between 10%
and 12%, creating a very large monthly mortgage payment.
So, how are you going to win the mortgage game, in this
case? You have two options.
First, you can improve the loan by reducing the LTV.
In other words, instead of taking a loan at 95% loan-to-value,
you apply for a first mortgage of $80,000 (80% LTV)
and a second mortgage of $15,000 (15% LTV). Here’s
how you save money. Instead of borrowing $95,000 at,
let’s say, 12%, with a payment of $977, not including
taxes and insurance, you have a loan for $80,000 at
8.75%, for a payment of $629. Your second mortgage is
at 13%, with a monthly payment of $166. Now, your combined
monthly mortgage payments with two loans are $795, saving
you $182 monthly over the first mortgage at 12% and
$2,184 each year.
The second option is to take an adjustable rate mortgage,
which offers great savings, just like conventional loans.
If you take a 2-year ARM, which sub prime lenders offer,
you might be able to get a rate of 7% or 8%, instead
of the 10% you’d likely get on a 30-year fixed
loan. You might also talk to your mortgage professional
about combining option one and two, and taking an ARM
on your first mortgage at 80% LTV and still taking a
second mortgage for $15,000. This could save you even
more.
Get a free mortgage course to learn more.
Mark Barnes is an investment real estate and real estate
finance expert. Get his free mortgage finance course
at http://www.winningthemortgagegame.com.
Mark is also the author of the new novel, The League,
a shocking, sports-related conspiracy. Learn more about
his suspense thriller at http://www.sportsnovels.com.
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