It used to be that if you had poor credit, there was no use in applying for a mortgage--you would not qualify. Today, however, loans are often open to those with less-than-perfect credit scores. If you have poor credit and want a mortgage to buy a home, chances are there's someone who will loan you the money.
Streamline refinance mortgages
Available only for refinancing existing FHA and VA mortgages, streamline mortgages require less paperwork for the closing process and usually have lower closing costs. Streamline mortgages are issued based on the same information you submitted for your initial loan, including credit information. This makes the process faster and also makes it an ideal loan for borrowers with bad credit. In addition to only being available to FHA and VA mortgage holders, borrowers must be up-to-date in loan payments, so if your bad credit stems from late mortgage payments, you might not qualify.
ARMs
An adjustable rate mortgage has an interest rate that adjusts as the loan ages. ARMs come with an initial period during which the interest rate is lower than the rest of the loan's term. Usually, this period is one, three or sometimes five years, after which the interest rate adjusts and monthly payments increase. The amount of these adjustments, and their frequency, varies and will be defined in your loan documents. Like the loans that follow, ARMs are usually easier to qualify for than fixed-rate mortgages, and many homeowners with less-than-perfect credit use the initial period to improve their credit so that they can apply for a fixed-rate loan before the ARM adjusts.
Interest-only Mortgages
These loans are similar to ARMs, but instead of paying a portion of the principal and a lower interest rate for a set period of time before adjusting, the borrower pays only the interest due on the loan. Borrowers pay a substantially lower monthly payment than they would with other types of loans. However, when the loan adjusts, both interest and principal become due, and loan payments increase significantly. In addition, because you will not be paying any principal payments during the initial period of these loans, you do not build equity in your home.
Balloon Mortgages
Like fixed-rate loans, a balloon mortgage requires a regular payment over the life of the loan, usually between five and 15 years. Because most balloon mortgages are written based on a 30-year amortization, the payment might be similar to that of a 30-year mortgage. But at the end of the balloon period, the total remaining amount of the mortgage becomes due. It's this large, balloon-like payment that gives this loan its name.
Wait
If you have bad credit, the best option is to wait until your credit improves before you apply for a loan. To ensure your credit improves and then remains at high, be sure to make all loan payments on time. Keep your credit card balances at less than 50 percent of the credit line. If your card has a limit of $5,000, your balance should be below $2,500. And don't apply for too much credit. Every time a potential lender views your credit records, your credit score decreases, sometimes by as much as 12 points. And keep an eye on your progress by getting a free credit report from each of the three major credit bureaus: Experian, TransUnion, and Equifax. In time, you'll qualify for the best rates and terms.
If You Can't Wait
If you really, really need a mortgage now, use the initial period of your ARM, interest-only or balloon mortgage to work on improving your credit. Unless you sell your home in the interim, your goal should be to improve your credit so you can be approved for a mortgage with a better interest rate or better terms before your loan adjusts.
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