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| Finding a Mortgage if your Credit is Not So Good
By Mark Barnes Direct Lending Solutions Staff Writer
There are great mortgage loans for people with damaged 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, under the old system. 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. So, the poor credit, or non-conforming, lender says, “We’ll take the risk, but we want to make a lot more money, in order to do it.” So, don't worry. You can get it done, and improve your situation to refinance at a better rate later. Let’s assume you have less than perfect 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 550, you’ll likely get your $95,000 loan. Your interest rate, however, will be between 8% and 11%, 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, 11%, with a payment of $904.71, not including taxes and insurance, you have a loan for $80,000 at 7.75%, for a payment of $573.13. Your second mortgage is at 10.5%, with a monthly payment of $137.21. Now, your combined monthly mortgage payment with two loans comes to $710.34 , saving you $194.37 monthly over the first mortgage option and over $2,332 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 most sub-prime mortgage lenders offer, you might be able to get a rate of 5% or 7%. 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. Useful External Resources:
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