Mortgage Lenders Low Credit Scores – The Cost of Bad Credit
Getting into credit trouble can happen to the best of us. One missed payment on a high-limit credit card quickly adds up to a damaged credit score. While you may not think bad credit is all that important, your credit plays a critical role. Primarily when it comes to how well you’re able to move forward with a home purchase. Put simply, bad credit costs you significantly in the short- and long-term. Especially when mortgage loan officers and brokers deal with the requirements of mortgage lenders low credit scores.
Mortgage Lender Risk – What is the Standard?
Risk-based lending, is defined as the practice of offering different interest rates and repayment terms based on risk for default. This definition is the standard for the majority of mortgage lenders. Most mortgage lenders view you as a high-risk borrower when your credit is less than perfect. Late payments, accounts in collections, maxed out credit cards, or a bankruptcy all signal a red flag for mortgage lenders. To offset this risk, mortgage lenders and brokers must comply with conditions of mortgage lenders low credit scores requirements. Translation, you’ll pay more for a mortgage financing.
Low-risk borrowers are more likely to receive more affordable repayment terms on a mortgage loan given their solid financial history. If you fall into the high-risk category, the cost of borrowing, or the interest rate, will be far higher. In fact, high risk borrowers that fall below the standard could have their mortgage loan application declined .
By reviewing factors not related to your credit score, mortgage lenders may work with you if your credit is poor . They may evaluate your income and the stability of your job. They may also look at assets to repay a debt, or education history if you’re just starting out.
While not the standard, additional factors can help in getting you the mortgage loan you need. However, when it comes to qualifying for a mortgage loan, a strong credit history should be priority number one Ways How to Improve Your Credit Score.
Higher Payments… on Everything
The total cost of mortgage borrowing is the most harmful way bad credit troubles you. With a lackluster credit history, a mortgage loan could come with a much higher interest rate. You’ll realize an even higher cost for the same amount borrowed when the loan numbers get bigger.
A mortgage for $200,000 at a 3.75% interest rate would equate to a $946 principal and interest payment each month. With a total cost of $340,427 over the life of the loan. Bump that interest rate up to 6% and your monthly payment jumps to $1,199. With a staggering total repayment of $431,676 over the same 30-year period.
To make matters worse, you’ll also experience higher interest rates on credit cards and personal loans. These accounts are higher in cost because there is no asset to back them up in the case of default. The national average rate for a borrower with good credit is 15.07%, for a bad credit is 22.73%. These numbers are staggering, making credit for a new home out of reach for those with a bad financial history.
In addition, home insurers may look at your credit to determine how much of a risk you may be. Insurance companies use your credit score as well as previous claims to decide how much your home premium should be. With bad credit, you’re far more likely to pay unnecessarily high homeowners insurance costs.
Reduced Borrowing Power
Putting monthly costs aside for a moment, bad credit also directly impacts your borrowing power in a variety of ways. With poor credit, even if the interest rate is high, mortgage lenders often limit the amount of available credit. In fact, the amount of available credit can be limited .
Whether that is for a home purchase or a cash flow boost when financial emergencies happen. Similarly, insurers may reduce the coverage you have on your home if your credit is lacking. Lessening total coverage means they are taking on less risk in the event you make a claim. Reduced borrowing power when something goes wrong may leave you out of luck when it come to credit availability. Reduced borrowing power is limited when loan personnel evaluate what mortgage lenders low credit scores requirements are.
When it comes to home financing, bad credit impacts your total overall costs. Bad credit not only limits the amount of new credit, but also higher interest rates. Home insurers work in a similar manner, focusing on protecting their bottom line more so than yours. To avoid the high cost of bad credit, control spending, make on-time payments, and check the accuracy of your credit.
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