Bad Credit Mortgage Loan

We are just coming out of one of the worst economic downturns in several generations. Jobs are being lost, homes foreclosed on, and the stock market has plummeted. Still though, homes are cheap, and there are deals out there, if you can get a mortgage to buy a place. In the essay below I will look into what Credit score is needed for a mortgage, and what your chances of getting that dream home are, in todays market.

How Does a Credit Score affect Your Mortgage Chances?
It is pretty obvious that if you have a lousy credit score, you will have less a chance of being approved for a mortgage. That being said, as we discuss on our main website, even a credit score as low as 450-500 can and often are approved for bad credit mortgages. In a tighter financial environment though, more and more banks are turning borrowers away, not wanting to add fuel to the financial fire that almost all banks in the United States are undergoing. Also note that mortgage lenders do not simply base an approval or denial on your credit reports. A borrower may have a credit score in the 800 to 850 range, which is perfect, however if they are trying to borrow $500,000, while putting $50,000 down, and only having an income of $30,000 a year, no bank or lender in their right mind would lend them money. On the other hand, a borrower may have a sub prime score in the 550-600 range, want to borrow $100,000 after putting $75,000 down, and have income of $200,000 a year. The latter borrower would have a better chance of approval over the former borrower, even though there is 250 point difference in their credit score.

Credit Determines Interest Rate more than Mortgage Approval Rate
Many borrowers who have low scores think it’s impossible to get a mortgage. The facts are though, they likely could get a loan, however it will cost them quite a bit more. Lets look at two example to see how a low credit score can impact the cost of a mortgage over the term of the loan:

Example #1 – $100,000 Mortgage with a 740 credit score
A typical bank today would likely give a borrower with a 740 score, an interest rate of 5.5%. This would equate to a monthly payment on a 30 year fixed rate loan of $567.79 per month, $6813.48, or $204,404.00 over the life of the 30 year mortgage.

Example #2 – $100,000 Mortgage with a 550 credit score
A typical bank today would likely give a borrower with a 550 score, an interest rate of 8.5%. This would equate to a monthly payment on a 30 year fixed rate loan of $768.91 per month, $9226.92, or $276,807.00 over the life of the 30 year mortgage.

That means over a 30 year period, the person with the lousy credit score of 550 will pay $72,403 more than the person with the above average score. That is a total of 31% more than the original loan was for.

Final Thoughts and Important Mortgage Info
Remember, the decision to lend you money lies solely in the hands of the lender. There is not a high or low credit score for mortgage approval. Some banks may approve your mortgage, even with a terrible credit score, while others may let you go. There are many more factors involved in the approval rate of a loan than just your credit score. These include, details of your credit report, net worth, debt to asset ratio, income, job stability, age, etc. Don’t ever get fooled into thinking, you have no chance of qualifying for a mortgage, because, someone out there will be willing to lend to you for the right price. Also, remember that just because a bank will lend to you with bad credit, it does not mean you should always take that loan. I advise clients to rebuild their score via time, and smaller loans, such as using a credit card. Within a few years a lot of the damage you have done to your credit, can vanish if you clean your act up, and start taking responsibility for your future.