A lot of people inquire about the difficulty of securing a mortgage at a decent interest rate when buying their first home if they have bad credit. The short answer to this is that it is possible but a lot more challenging. Generally speaking, if you have bad credit lenders will consider you to be a higher risk borrower and will likely charge you a higher rate to compensate for that extra risk. In general, it is at least 2% higher than a borrower with excellent credit. There are other influencing criteria, however, which include things like your current income, collateral, the final loan amount, and of course your exact credit score.
The best advice that anyone can give you is that you are far better off taking a few months to repair your credit before applying for a home mortgage rather than applying with bad credit. You’ll likely save a LOT more money in the long run. Consider this real world example. Let’s say that you have excellent credit and secure a mortgage for $200,000. In this scenario, you could realistically secure a mortgage at 6% which would mean your monthly payments would be around $1,199.10 and over a period of 30 years you’d pay $231,676.28 in interest in addition to the $200,000 that you borrowed. If, however, you have bad credit then in the best case scenario your rate would be 8%, meaning your monthly payment would be $1,467.53 and you’d pay $328,310.49 in interest over the same 30 year period. Therefore, applying with decent credit could save you $260 month and around $96,000 for the duration of your loan!
Having said all that, however, there are options available to you even if your credit isn’t perfect. For starters, you can look into the various federal mortgage programs currently available. If you qualify for and secure a certain type of FHA loan for 1-4 unit properties, your down payment can be as low as 3.5% of the purchase price and your closing costs can be including in the loan. You should also get in touch with HUD funded housing counseling agencies that can walk you through options that are available to you. You may also be able to take advantage of certain local home buying programs through your local government. A good place to start are the blue pages in your phone directory. Just look up your local office of housing and community development. If you can’t find it, your mayor’s office or your county executive’s office.