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| Finding a Mortgage if your Credit is Not So Good
By Sharon Secor Direct Lending Solutions Staff Writer
While it is an unavoidable fact that people with better credit scores, 680 or higher, tend to enjoy preferential treatment from mortgage professionals, that doesn’t mean that those with damaged credit are forever locked out of the home mortgage market. It does, however, mean that, in many cases – particularly if you fall into the sub-prime category with a score of less than 600 -- you will have to work a bit harder to find the right mortgage opportunity for you. You should also expect to pay more for your mortgage, although there are ways that you can reduce those costs to a certain degree. The landscape of lending has dramatically changed with the conditions that have created the current economic situation. That means that some of the mortgage options for those with challenged credit are no longer as widely available or simply are not the best financial move in today’s fiscal circumstances. While those in the sub-prime credit score pool tend to feel this trend towards tighter lending standards more, the fact is that lending is tightening up all over, a natural reaction to the forces of the market and a natural response to the era of loose lending that we recently experienced. Some of the more creative types of loans that worked well in recent years for some borrowers and not so well for those borrowers that were less financially prepared for those types of loans include combining a first and second mortgage in order to lower the loan-to-value ratio. In this type of situation, rather than a borrower with a less than prime credit score taking out a loan for 95 percent of the purchase price of the home, that borrower would take a first mortgage for about 80 percent of the purchase price at one interest rate and a second mortgage for the other 15 percent needed at a lower rate. The advantage to this is that the borrower saves money on interest by not attempting to finance the whole amount at the higher interest rate. That strategy can reduce the monthly payment amount significantly. Now, with the market what it is today, this option is less widely available than it once was, particularly as credit costs creep a bit higher as lenders struggle against rising defaults and other financial woes. Adjustable rate mortgages have also been a popular choice during the past few years and have also become less widely available and more worthy of a second thought or two before entering into. In this type of mortgage, the interest rate is initial low for a set period of time. Once that introductory period is past, the rate of interest fluctuates according to specific financial indicators, such as LIBOR, or the London Interbank Offered Rate, and the rates on CMT securities, or 1-year constant maturity Treasury securities. That periodic interest rate reassessment based on such fluctuations can have a significant impact on the amount of the monthly payment. A common strategy is to refinance the mortgage to better terms, either a more favorable fixed rate or a better ARM, as by the time the rate is due to reset, in the best case scenario, the borrower has improved their credit rating by making on time payments and increased home equity to a degree that better terms have been earned. The cost of credit is something that has risen, right along side of all the other price increases faced today, including food and fuel. In recent years, sub-prime borrowers could expect to find that most of the same mortgage options available to prime borrowers were available to them with relative ease, though at a bit of a higher overall cost. And, many were happy to take advantage of these opportunities, as most recognized that lenders were taking somewhat of a greater risk with them, at least as the numbers figured on paper. After all, numbers on paper are a major part of how a lender is able to make a decision about someone he doesn’t know personally. More traditional standards have come back into vogue in the lending world, such as a down payment of 10 or 20 percent. In some cases, a borrower may see that, by running the numbers related to the various mortgage opportunities available, they may be better served over the long-term by saving up for a significant down payment and, while doing that, working to improve the credit score, so that better rates and other terms and conditions can be earned. However, it is also true that running the numbers can show that taking on one of the less than prime mortgage options can be worth the additional cost of credit that tends to accompany such loans. Finding the best of these loans – those with the most favorable terms and conditions – will take some extra research and work, but it can be well worth the investment of time and effort. Finding the right mortgage when your credit has been damaged can seem like a much more daunting task in today’s climate. However, many borrowers still find that it is possible to find a mortgage within their ability to comfortably make that all important monthly payment. Still more are well served by taking the time to work towards meeting more traditional standards, as the cost of their credit can be significantly lower than if they’d have rushed into pricier loans that lenders felt were riskier. The bottom line is that, over the long-term, tighter lending standards benefits both lenders and borrowers, as lenders are more sure their loans will be repaid and borrowers can be more sure that they will be able to afford to keep that beautiful home they are paying on and end up paying less for it. 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