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Should you get a mortgage if you have bad credit?

March 18th, 2011

Advertisements promising mortgages for those with bad credit are a dime a dozen. But often, the claims are exaggerated and mortgage loan applicants are turned down because they are seen as too big of a risk. When people are approved for a loan even though they don’t have great credit, they end up paying more because of high interest rates. You may be determined to not let having bad credit keep you from getting a mortgage, but should you really get a loan?

Not-so-ancient history

The reason mortgage lenders review your credit history is to determine what kind of consumer you are. Having bad credit is a sign that something in your past and present has kept you from being financially responsible. Maybe you fell on hard times after a job layoff, divorce or major illness in your family. However you got to where you are, money has been handled in a way that indicates that lending money to you at this time might be a mistake.

Questions for you

Getting a home loan is a major financial decision that can really backfire if not handled properly. Ask yourself the following questions before applying for a mortgage:

  1. Are you really ready to take on the payments for the mortgage loan, taxes and insurance? Tax payments are set by your town based upon a property assessment, but mortgage and insurance payments will be affected by your credit score.
  2. Why can’t you wait to buy a home? Are you currently living in a rental and having difficulty keeping up with the monthly payments? Getting a mortgage loan isn’t going to improve that dilemma in most cases. Remember, owning a house means you’ll be responsible for repairs, upgrades, yard work and anything else that comes up.
  3. Why should mortgage lenders trust you to repay a loan? Be honest about your financial behavior up to this point. Have you been dishonest with others and yourself when dealing with bill collectors and creditors? Are you constantly making excuses for why you’re late with payments? Do you tell your kids or other family members to lie to bill collectors when they call? These are signs that you probably are not ready to get a home.

Repair credit before mortgage application

The bottom line is that going through the steps to repair credit can prepare you for getting a mortgage loan down the line. If you need help doing this, find a reputable debt counseling agency in your community.

Should you accelerate mortgage loan payments?

March 13th, 2011

Many Americans have slashed their spending and are doing without in order to pay off debt and lessen the effects of the troubled economy. Paying off mortgage loans early has become more popular, something that many financial experts have traditionally advised against.

Getting free of a mortgage

The argument for accelerating payments on a home mortgage is that you build equity faster and ultimately will own it free and clear of any debt obligation. You will always have the security of knowing that the place is yours as long as you want it to be. Paying off a home mortgage in full also would likely free up a significant chunk of your income, allowing you to have more control and freedom to use it for other purposes.

Using income for other investments

Those who are against accelerating mortgage payments often cite the loss of the mortgage interest tax deduction. They also point out that instead of putting extra cash toward a home loan, the money could be invested in mutual funds or other investments that may earn you more money. Also, during the years when you are accelerating mortgage payments, you may have less income to put toward other things.

Biweekly mortgage payments

Before you starting attacking your mortgage debt for a faster payoff, learn as much as you can about the various methods. Biweekly mortgage loan payments can allow you to pay off a 30-year mortgage about six years ahead of schedule. Instead of making mortgage payments once a month like a lot of borrowers do, you make a payment every two weeks. So instead of making 12 payments a year it works out to 13 payments.

Most mortgage lenders allow biweekly payments, but usually charge a fee to set it up. Skip the fee and set up your own biweekly mortgage payment plan. Check with your mortgage lender to see if you can send half of the payment every two weeks. If the lender won’t allow it, divide the monthly payment by 12 and add that amount to the payment on the principal each month.

Use cash windfalls

Use bonuses and other cash windfalls to pay down mortgage debt. Make sure you don’t need the money for other expenses that are more pressing than paying off a mortgage. For instance, putting lump sums of cash toward credit card debt can wipe out high interest payments, which would give you a better return on your money than paying off low interest mortgage debt.

All-cash deals made up 28 percent of home purchases in 2010

March 4th, 2011

Having enough money to purchase a home outright might seem like a fantasy, but 28 percent of all homes bought in 2010 were all-cash deals, according to a recent Wall Street Journal article. Areas that had more depressed housing markets had more all-cash purchases.

Among the areas that saw a lot of these purchases is Miami-Fort Lauderdale, were over 50 percent of purchases involved cash buyers. About 42 percent of real estate purchases in Phoenix were all-cash deals.

“The prices were just irresistible,” Richard Stoker, who paid cash for two condos in Miami Beach, Fla., told the Wall Street Journal. “Florida’s been hit pretty hard.”

No mortgage loans

Buyers who pay with cash may receive a discount off the price of a home.They also have the freedom that comes with owning a property free and clear of a mortgage. Often people who are able to purchase a house with cash are investors. According to San Diego-based DataQuick, “All-cash deals have become popular in many Western markets where prices have dropped sharply, luring investor buyers who don’t always qualify for traditional mortgages. Moreover, sellers favor the relative speed and certainty of all-cash transactions.”

While investors are more likely to do all-cash deal, that doesn’t mean that there aren’t buyers out there who can afford to buy a home without a mortgage. The Money Saving Mom blog describes in a series of articles how one couple scrimped and saved to get the money they needed to buy a home in an all-cash deal. Buying a home with cash isn’t for everyone and requires a lot of sacrifices and careful planning. To determine if it is even possible to aim for the goal of buying a house with cash, you may need to work with a financial advisor to put together a plan.

What if you need a mortgage?

If, however, paying cash is too unrealistic of a goal to achieve, you’ll need to plan for getting a home loan if you want to buy a house. Be prepared to provide plenty of documentation about your income and assets when applying for a home mortgage. You also want to have the best credit possible since many mortgage lenders expect you to have a credit score of at least 720 to qualify for the best mortgage rates.