If you are a veteran see our article on How You Can Use Your Military Benefits To Buy A Home to better understand all the options available to you as a veteran.
In the old days if your credit history was less than perfect, the only mortgage you would be offered would be one with extortionate interest rates from a shady broker.
Nowadays, there are more sympathetic lenders who will offer you a bad credit mortgage without charging you sky-high interest charges. And because there are more lenders out there now offering these non-standard mortgages, it has driven the interest rates on them down which is good news!
The term ‘Bad credit’ can be anything from County Court Judgements (CCJ’s) on your credit file to something like having missed a mobile ‘phone payment or made a few mortgage payments late.
More and more people now have a ‘bad’ credit file. Rising inflation and credit companies making it easier for people to borrow means that just because you have a bad credit file, you are not rubbish with money!
How To Protect Yourself From Mortgage Lenders
So, what can you do to get a mortgage, without being ripped off by greedy lenders?
First of all, if you are considering using a mortgage for debt consolidation, do bear in mind that it will probably cost you more in interest in the long run. And also the debt will be secured against your home, so you must really ensure that it is affordable to you.
And when it comes to choosing a mortgage, do not apply for the first mortgage that you see. TV adverts saying that they can help people with bad credit are all very well – but many of them charge as much as a 3% fee to arrange a sub-prime mortgage. So, on the face it looks like a good deal but in the long run we ended up with the 2008 housing crisis.
So what can one do to protect themselves and their future homes from the devastating effects of one bad decision? Wait.
Yes, I said wait. One of the worst things you can do is overspend on money that you do not have. Take careful consideration when signing any mortgage documents and make sure that your home loans have fixed rates. There is a light at the end of the tunnel and you should be very careful about what you do with your cash. Taking a financial class will help you get to the point to where you are able to purchase that new home sooner.
This brings us to the next topic which is.... Income
Qualifying for a mortgage can be a stressful affair. A common problem that can occur is not having enough income to qualify for the loan amount. If you have this problem, here are a few possible solutions.
Mortgage Creativity
You find the house of your dreams and need to get a home loan. You have great credit, almost no debt and have been employed for five years with the same company. You apply for a loan and are stunned when you are turned down. The reason? The lender says you have insufficient yearly income to justify the loan amount.
What the lender is really telling you is it doesn’t think you can afford the monthly payments for the mortgage. Before you go ballistic, you should sit down and seriously review your financial situation. Getting a home loan is fine and all, but not if you are unable to make the monthly payments. Try to be realistic in your evaluation. It will save you many sleepless nights. But, what if you can afford the payment?
The first creative solution you may want to consider is an increase in the amount of the down payment. By increasing your down payment, you will reduce the amount to be borrowed which can make all the difference in qualifying. If you can bump the down payment up to 25% of the total value of the property, many lenders will relax the qualification requirements.
Alternative Loan Sources
A second creative solution involves alternative loan sources. Initially, good old mom and dad may be able to help you out. In fact, this is one of the traditional down payment funding sources for most first time homebuyers.
401k Retirement Loan For A Down Payment
A less known alternative, however, is your 401k retirement account. Under federal law, you can borrow up to 50% of your 401k balance. The repayments have to be made in five years, so analyze how this option will impact your finances. If you can pull it off, you will be in the advantageous situation of paying yourself interest instead of a bank.
Regardless of the approach you take, insufficient income need not be the end of your home buying prospects. Get creative and you can find a solution.
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