Buying a house today can be rather difficult. You might have even heard that there are factors out there that can affect the success of your application for a mortgage.
One of these is your credit score. Truth be told, even people with average credit scores have a 50/50 chance of getting their mortgage applications rejected. So what does this imply for people with low credit scores? Will having a low credit score prevent you from getting a mortgage?
The answer is no but that doesn’t mean you should get too reckless with applying for mortgages, either. There is a way to get a mortgage even with a low score but it’s going to be a rather difficult and demanding process.
You might have heard that low credit scores can affect a lot of non-credit transactions that you can make. This includes applying for a job, looking for an apartment to rent, and even purchasing something large like a car or a boat. To that effect, people with high credit scores should have no problems convincing that lender/landlord/employer that they are worth a try while those with lower scores are at risk of getting rejected.
Why is this so? It all boils down, really, to the word “risk”. You have to keep in mind that these people see all applications being submitted to them as investment opportunities. For an employer, an applicant is a potential asset that they can mould. For a lender, every person trying to loan money from them provides for an opportunity to let their money grow.
Also, there is the fact that a credit score usually works as merely a reference to the buyer. It does not have any sanction of sorts which compels a person to outright reject their application. It simply tells a lender that you are a riskier person to loan money to.
As such, there is nothing out there that states that your credit score will be the sole factor in determining whether your mortgage application gets approved. It’s still up to the lender whether they are going to deal with the risk of doing business with you given your track record.
On the flip side, that lender is still going to get their investment from you, not just in a way that is quick or easy. This means that approving your mortgage will require a certain restriction to be put in place to really compel you to meet with your obligations. As far as mortgages go, this will come in one form which will be discussed later on.
In order for lenders to consider you as a subprime borrower, having a low credit score is not enough. Your credit score has to contain certain derogatory remarks which will include:
Also, it is important that what creditors consider to be “low” does not exactly mean the poor to very poor range in any credit score hierarchy as even average to above average scores can also have a difficult application processes. For instance, even if your score from Experian is at 680 (which is a decent score, mind you), there is still a chance that your mortgage application is going to get approved but with certain strict conditions.
To mitigate most of the risks from doing business with people with low credit scores, lenders often charge them with interest rates higher than the norm. The reason for this is quite simple: if you are given a high interest rate, you’d be compelled to settle that debt sooner or later. In essence, the lender gets to earn a lot from their investment and you’d be forced to develop better financial management skills.
Here’s the twist, however: Mortgages are known for their long payment rates. Rarely will you ever hear about a mortgage being payable within 2 to 5 years. Normally, they’d go at least 10 years or as much as 30 years.
So, if you have a low credit score, you’ll be given a high interest rate. And since your mortgage is going to be payable within a decade at least, that means you would be spending what is practically a lifetime paying more for the interest and less for the principal amount.
The best way to ensure that you don’t have to deal with high interest rates for your mortgage is to make yourself appear less of a risky investment to would-be lenders. Before you apply for a mortgage, you should always make it a habit to request for a credit report from your credit reporting agency of choice.
Within a few working days, you should be given a copy of your last credit report. The details there will tell you which data might potentially affect your application.
Now, if you think that your credit report is good then there’s no stopping you from submitting your mortgage application. However, if you think that the score needs a bit of an improvement, it’s best to postpone that application and focus on making some improvements in the way you handle your credit.
If there is a sense of urgency in your mortgage application, there are several alternatives that you can opt for.,
Simply put, you are going to get a mortgage with a high interest rate from the start. However, once your financial situation has improved, that lender might become open for adjustments to your rate. This option is actually quite perfect for mortgage applicants who need funding as quickly as possible. The flexible rate allows you to renegotiate your payments once everything gets better for you.
So can you apply for a mortgage even if your credit score leaves a lot to be desired? Yes. But should you? The answer is no. Just because you can apply for a mortgage even if your score is low does not mean that you should start submitting applications ASAP.
The best course of action here is to improve your standing with the credit reporting agencies first before you apply for mortgage. And if it is necessary that you have to apply for mortgage in the soonest possible time while you are still fixing your credit score, then there’s no harm in trying out non-mainstream options. Either way, you have to make sure that you have the means to meet the demands of this decades-long contract if you want to make the most out of it.
Have you ever tried applying for mortgage before? What other factors do you think will affect interest rates for your mortgage? Let us know in the comments below.