Can you get a mortgage if you have a checkered financial past?
Your prospects may be much better than you think. After all, lenders don't make money turning applicants down. And lenders have discovered that they can safely do business with people they used to spurn.
For lenders, mortgages are fairly low-risk loans. The property serves as collateral, and with property prices rising fast, a lender is fairly certain of being able to foreclose and sell a property for enough to cover the debt if the borrower stops making payments.
So if you'd like to buy a home or refinance an older mortgage, don't let some past problems discourage you.
Interest rates on standard 30-year loans have been drifting up -- from around 5.5 percent a couple of months ago to about 6 percent today -- and many experts think they'll keep rising. Anyone thinking of buying a home or refinancing an older mortgage should be shopping.
With rates rising, fewer homeowners are refinancing. Many lenders may be hungrier for business than they were a few months ago -- and thus, happier to do business with applicants they might once have turned down.
People with faulty credit histories -- late payments, legal judgments or liens against them, even bankruptcy -- often can get loans, says Myvesta, a nonprofit consumer education organization in Rockville, Md. The key is to have cash for a down payment and enough steady income to make monthly payments.
The worse your history, the larger the down payment required, since that reduces the size of the loan relative to the property value. The lender, thus, has a better chance of recovering the balance owed if you default.
Different types of applicants
Lenders used to serve only people with impeccable credit -- so-called A loans. Now, says Myvesta, many serve B-level applicants, who have good credit histories for the most recent 12 months but before then may have missed a few payments on credit cards, student loans or their mortgage.
B-loan applicants typically have to make larger down payments and pay interest rates 1 to 2 percentage points higher than A-loan rates, Myvesta says.
Some lenders will approve C loans, for people with clean records for 12 months but serious problems before then, such as multiple late payments or even bankruptcy or foreclosure. Down payments must be even higher, and interest rates may be as much as 3 points above the A-loan rate.
The D-loan customer -- someone with a foreclosure or bankruptcy in the past 12 months -- has to make an even larger down payment and may well be charged interest at double the A-loan rate, Myvesta says.
Of course, with a higher interest rate, the monthly payments are higher. That means you can't qualify for as large a loan. If you have bad credit, you may have to look for a cheaper property.
Sources of information
You might look for a less conventional form of financing, such as a loan from a friend or relative who trusts you despite your past financial problems. These days, some people will be happy to make loans at 6 or 7 percent, since that's two or three times what they could earn with bank savings.
Also, the seller may be willing to "carry the note" -- allow you to make monthly payments to him rather than to pay the entire purchase price at once. The seller, for example, might not want to pay the taxes that would be due on a property sold at a profit.
In some cases, developers selling new homes offer "mortgage buydowns." They pay part of the buyer's mortgage for a few years to make it easier for the buyer to get a loan.
If you're buying a home, the real estate agent should be able to help you find a lender.
Or look in the Yellow Pages under "mortgages" for listings of mortgage brokers. Each broker deals with a number of lenders.
And do a little shopping on the Internet. Try the mortgage referral service run by HSH Associates, the Pompton Plains, N.J., mortgage information firm, at www.hsh.com. Click "Lenders & Rates," then "impaired credit."
Also try Mortgage Expo at www.mortgageexpo.com. Click the button labeled "imperfect credit."