Consumers with bad credit will pay more for their mortgage loans.
The good news is that even people with bad credit and high levels of debt can qualify for mortgage loans from conventional mortgage lenders or banks. The bad news is that these lenders will charge borrowers who have these strikes higher interest rates. This is significant: Depending on the size of a mortgage loan, a higher interest rate can cost borrowers hundreds of dollars extra every month.
Credit Scores Are King
Mortgage lenders rely on consumers' three-digit credit scores to determine whom to lend money. They also use the scores to determine what interest rates to charge these borrowers. Borrowers with low credit scores have to pay higher interest rates on their loans. That's because lenders consider them to be more of a credit risk.
Credit scores generally range from 300 to the high 800s. Most mortgage lenders, though lenders do vary, will charge the lowest interest rates to borrowers with credit scores of 750 or higher. Borrowers who have credit scores under 620 will struggle to qualify for any mortgage loan from a conventional mortgage lender. They may instead have to work with subprime mortgage lenders who charge higher interest rates and origination fees.
There are several factors that cause a credit score to fall. Consumers with bad credit will have lower credit scores. These are consumers who have missed several payments in their past or who have a history of paying their bills late. Consumers who have bankruptcy filings or housing foreclosures in their past will also have lower credit scores. Consumers who have high levels of credit card debt will see their credit scores fall, too.
Consumers with low credit scores can shop around with mortgage lenders to find the best possible interest rates. It's true that lower credit scores will prevent borrowers from qualifying for the lowest rates. But lenders do vary in the rates they charge, even to borrowers with high levels of debt and bad credit histories. Consumers do not have to apply for a mortgage loan with a lender in the San Francisco area. Their lender can do business from anywhere in the country, as long as it is licensed to originate loans in the San Francisco area.
Fixing Credit, Debt Flaws
Consumers can also rebuild low credit scores. The best way to do this is for them to build a new credit history. This happens when consumers pay all of their bills on time every month. They can also boost their credit scores by paying down their outstanding credit card debt.
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