Having a poor credit score will not automatically prevent a person from obtaining a home mortgage, but it will certainly make getting a mortgage more difficult. If a lender can be found, the home buyer can expect to pay higher interest rates than a person with a solid credit history.
Effects
Borrowers with poor credit are considered to be greater risks than borrowers with good credit, therefore they will be charged higher interest rates. There are no written guidelines as to how much more a person with poor credit will pay because the borrower's credit score and the types of bills that were paid late will be taken into consideration.
Considerations
In addition to paying higher interest rates, borrowers with poor credit can expect certain stipulations to be written into a mortgage agreement. Prepayment penalties are one common stipulation. Balloon payments, in which a significant portion of the loan amount is due in five years, is another common attribute of home loans made to those with bad credit.
Identification
People with bad credit are often referred to as subprime borrowers in the lending industry because their credit is less than desired to receive a mortgage loan. A credit score under 660 or constantly paying bills late could earn a person subprime status. The past two years of one's credit report will be looked at most closely by the lender.
Significance
Mortgage loans do not tend to differ much for those with good credit, but borrowers with bad credit should shop for the best deal they can find. Lending institutions that make subprime home loans have different guidelines to consider credit risk, which could make drastic differences in the lending terms.
Potential
The Federal Housing Administration often has more lenient standards than commercial lenders and makes loans to those considered to be subprime borrowers. The main requirements to receive an FHA loan are an employment history, a credit score above 620 and no more than two accounts that were more than 30 days past due on your credit report in the past two years. The FHA will also look at bankruptcy history and credit-to-debt ratio before making a decision.
Prevention/Solution
If you are turned down for a mortgage, the lending institution is required to give the reasons why. It might be worth it in the long haul to set aside your home ownership dreams for a bit to concentrate on correcting the reasons you were turned down for the loan. Once your credit score has improved, you can apply for another home loan. Not only will your chances have increased for being accepted, but will likely have earned lower interest rates in the process.
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