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Applying for a mortgage with bad credit

One of the major concerns for anyone applying for a mortgage is whether or not they are going to be taken advantage of and “get ripped off.” This concern is even more justified if you have bad credit.

Potential borrowers with bad credit, especially first time buyers with bad credit, go about the process of getting a mortgage with little confidence because they know they will not get the best rate. This attitude and lack of knowledge is what leads borrowers to being ripped off.

An article posted on, titled, “Getting a Mortgage?-Avoid Getting taken Advantage of!” explains that even if you have bad credit, you should pre-qualify yourself so that you have the proper knowledge of what to expect, thus avoiding exploitation.

The first thing you should do is to examine your credit score. Give yourself a grade such as an A for great credit (750 and above) to a D for very poor credit (under 500).

Next, you should understand your loan-to-value ratio. This is the ratio between the amount of money you borrowed on a home mortgage loan and the real value of the property being placed as collateral.

“To know the value of new purchases, as a borrower, you would have to consider the lower purchase price of the appraised value. If a home owner has lived on the property for about six months or a year, coupled with refinance, the appraised value can be used in the loan to value calculation.”

Another ratio to consider is your debt-to-income ratio. You can calculate this by adding your debt payments (the home loan you are applying for, credit cards, car loans, etc.) and then dividing this amount by the net cash available each month for your living expenses and debt. “Lenders would not prefer this figure to exceed 40%.”

With all these calculations handy, you should be able to estimate your affordability and where you fall in the credit system in regards to a home loan.

One of the most important things to understand about mortgage loans is the point system. Lenders charge additional points to borrowers. One point is equivalent to paying an additional one percent of the entire loan amount.

“If a borrower has a history of bad credit, lenders will charge him more points and higher rates of interest since it is a risk for a mortgage lender to deal with such a person. But borrowers on home mortgage loans with a good credit history should not enter into a mortgage agreement where they are forced to pay points based on a bad credit loan.”

“So, borrowers with good credit may often pay as little as nothing while those with bad credit will usually have to pay four or five points. Sometimes, unwary consumers have been asked to pay up to 10 points-something highly unwarranted. In fact, if this happens to you or anyone you know, he should consider it a red flag that someone is trying to cheat you.”

The lender would probably justify this action by saying that he or she can provide you a loan where no one else can. Do not believe it. This is where knowledge gives you power.

Even though you have bad credit, you can still shop around for the best rates. Most lenders will offer loan to those with bad credit, and like with all lenders, rates will vary.

You are not going to get rates as low and discounts like someone with great credit would, but you can also avoid getting taken advantage of, by having knowledge and doing a little homework.
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