The recent trouble in the sub-prime mortgage industry has made many people take pause. So it begs the question: what should you do if you’re a first-time home buyer and have bruised credit? Is a mortgage even possible?
If you have less-than-perfect credit, don’t think you’re excluded from getting a mortgage–it still may be available to you. Lenders use four different factors to qualify you for a loan–credit is just one. The others include your assets, how much income you make and the property you’re looking to finance. If you’re weaker on one factor, you may be able to compensate by being stronger on other factors. For instance, if your credit score isn’t quite high enough to qualify you for a particular loan, you may still qualify if you have, say, lots of assets or make a good enough income to prove to lenders that you can handle paying back your loan.
There are many different types of mortgages available, but most fall into three main categories: adjustable rate mortgages (ARM), interest-only mortgages and fixed-rate mortgages. The type of loan you get will depend on your individual situation. For example, if you are someone who moves often, you may want to get an ARM. If you’re looking for flexibility in your mortgage payment, you may want an interest-only loan. If you’re looking for security and predictability, a fixed-rate mortgage may be best for you.
But aside from considering your personal situation, you should also take into account the current mortgage environment when deciding which is right for you. The Federal Reserve announced yesterday that they would not raise short-term rates, which are tied to adjustable rate mortgages. But the fact that rates for ARMs aren’t currently rising could change at any time.
Long-term rates, which are tied to fixed-rate mortgages, are still historically low. They offer long-term rate stability since fixed-rate mortgages are long-term mortgages and your rate is fixed for the life of the loan. They also offer predictability which means it’s easier when budgeting your finances from month to month.
Interest-only payment options are available with ARMs as well as fixed-rate mortgages and allow you to lower your monthly payment (during the interest-only period) if you need to.
Even if your credit score is as low as 620, you can still qualify for a loan. If your score is lower than that, you may want to work to improve your credit score before you commit to buying a home. The higher your score, the more likely you are to get a better interest rate and better loan terms. If you’re not sure what type of loan to get, speak to an experienced mortgage banker. They can answer any questions you have and steer you toward a loan that properly fits your needs.