A Bad Credit Home Loan May Be More
Trouble Than It’s Worth

We all know about the credit problems going on across the country right now. We know about Freddie Mac and Fannie May. There are some things every American should know about a bad credit home loan. Knowing these things now could help you avoid a very painful situation in the future.

There have always been people who are willing to do business, even risky business, no matter the cost to the other guy. There are those who believe that bailing people out of bad decisions will solve any problems anyway, so why worry about the risk to the consumer? You need to be aware of these scammers before you buy into their deals. The old adage, “if it sounds too good to be true, it probably is,” is a good rule of thumb, especially when you are talking about an investment as big as your family’s home.

My family and I rented for a number of years before we bought our first home. We had some issues with our credit early in our marriage, so we knew we could have some trouble getting a loan. Sure we had people try to convince us to buy. Sure we considered it. When the time finally was right to look at buying our first home, we found that there were lenders who were playing the game with a secret deck, and we didn’t know all the rules. They may tell you low credit scores are not an issue in getting you a loan, but they are not telling you the whole truth.

While it may seem worth taking out a mortgage loan with a very low monthly payment, you are likely not getting what you think you are. Some companies offer an interest only loan, though that may not be what you are being told up front. In the interest only loan, you are only paying the interest on your loan, and you are not gaining ANY equity in your investment for a good long while, though you make your monthly payments. The bank is getting all their money back first, and you are left in a house you can’t sell.

People with an interest only loan have a really hard time selling a home in the first 5 years because they have no equity built up in it. If someone is offering you a 30 year $200,000 loan at 6% and $500 a month, do the math. Be smart about your loan. Read the papers, and if you are confused, ask someone outside your lenders’ office to help you clarify the conditions of the loan.

You may also get loan “offers” from lending agencies you have never heard of. Be careful about these people. They may offer you a low interest loan if you come up with a higher than normal down payment. Beware of such a catch. Also, don’t send any money to your lender, especially one without name recognition and credibility, before your closing. Don’t send money to a P.O. Box, and don’t send money to an individual or overseas lender. Chances are you will never see your money again, and you will not have the loan to purchase your house when closing day comes.

Something else we discovered was that lenders were very eager to put us in more house than we could afford. Be sure to know your budget! Don’t get in over your head because your lender says you can. Sit down with pen and paper. Write down every expense you have and compare it to your income. Don’t bank on pay raises, bonuses, or speculations. If you don’t see it every pay period, it is not real! Build your home purchasing budget on your financial ability to pay the mortgage, not on your lender’s recommendation for how much you can afford.

Instead of considering how to work a loan around your low credit score, consider doing a few things to change the score. If you have a low credit score, you probably have too much credit in your name, too little room left on any of your credit accounts, delinquencies on your accounts, or any combination of these three problems. Fix the problems.

Pay off one or more of your accounts. Once they are paid off, close the accounts to remove that credit burden from your report. Your score will go up soon after that is accomplished. If you are too close to your credit limit on several cards, instead of paying off one card, consider paying a substantial amount off each card, bringing each balance well below your limits. This will also help you improve your scores soon after the goal is reached. If you have delinquencies, change your spending habits to bring your accounts up to date. Eat at home instead of eating out and take that money and pay your delinquent bill. When all your accounts are current, the score will go up!

While it seems an attractive thing to buy a home because someone is willing to lend you money you can’t afford to borrow, it won’t seem like such a good idea when you lose your home. Ask any one of the millions of American families who find themselves in that situation right now.

Know your budget, analyze your credit scores, and take a few months to fix any problems before you try to borrow money for a home loan. Going with a bad credit home loan with all the pitfalls may not be a good choice. You will receive a safer, more stable loan from a reputable company, and you will be more likely to make those payments and stay in the home you worked so hard to purchase.

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