Bad Credit Home Loans
The first thing to understand about Mortgages and even Bad Credit Home Loans is that there are countless options. You must understand that everything you are about to learn is only a guideline. The reason there is a lack of hard set rules for anyone to understand is the vast amount of options that exist. When is comes to home loans and bad credit home loans there are thousands of banks offering countless products to choose from and each of these products has different rules you must meet to qualify. Hence, guidelines are the best place to start unless you plan to become a loan officer yourself! Your goal as a Mortgage shopper looking for a bad credit home loan or any home loan should be to understand how the business works and to find a Mortgage provider you can trust.
To start lets define the two basic markets that home loans fall into. The first is "A" Paper and the second is "B" Paper. Basically, "A" Paper loans are loans that meet Fannie Mae Guidelines (those described below) very closely. As a result "A" Paper loans benefit from the best terms and interest rates the banks can offer. On the other hand are "B" Paper loans which are loans that do not meet the Fannie Mae Guidelines very closely and generally make up your bad credit home loans. As stated for Bad Credit Home Loans, you typically will be shopping "B" Paper loans and as a result will not have as favorable terms or interest rates. However, don't be discouraged because the rates might not be the ones you see advertised all over the place but they can be very good! Also, once you are in a home loan or a bad credit home loan you have the benefit of tax deductions that help offset your interest payments. Whats that you say? Let me be more specific because this point is important and many people don't realize this. As a home owner the government gives you tax breaks for the interest you pay on your home loan or bad credit home loan. An example of how this works is as follows. When you get a home loan or bad credit home loan and are paying interest you will increase you deductions with your employer to account for your loan. Lets say you were single and had no deductions before you bought a home but now have a bad credit home loan. You would increase your deductions a certain amount to account for your interest payments. We will use 4 as an example but you will need to get direction from an accountant for your situation because this number will change based solely on your circumstances. So now instead of zero deductions you have 4 and your take home pay on a weekly paycheck goes from $800 a week to $875. Your take home pay goes up because your employer withholds less money to pay your taxes. More importantly and if done correctly, you still do not owe the government any money at the end of the year because the amount you have to pay the government as a home owner paying interest is less than someone without an "A" Paper Loan or a Bad Credit Home Loan. Again this is only an example but now you understand how this works. Now on to basic Home Loan and Bad Credit Home Loan Guidelines!
There are three basic points of interest that will be considered when you apply for a home loan or a bad credit home loan. The first is your past credit history and FICO score. The next is your income versus debts and the last is the amount of money you will put down as a down payment on the home!
The first criteria, your Credit History and FICO have the following impact. Generally speaking a clean credit report without any major derogatory information and a FICO of 620 and above are needed for an "A" Paper loan. On the other hand if you have negative credit marks in the past like a bankruptcy and a FICO below 620 there are still many options for a home loan with "B" Paper Bad Credit Home Loans. This is where a good Loan Officer comes in to play.
The next Criteria of your income versus debt is known as the Debt to Income Ratio. There are two formulas used and they are as follows. The first is based on your proposed monthly mortgage payment. This ratio can not exceed 28%. Meaning the monthly payment on your home can not be more than 28% of the amount of money you make each month before taxes. The second ratio is based on total debt. This number is 36% and is the cumulation of all your monthly debts versus your monthly income. This means your total monthly debts including mortgage payment, car payments, credit card minimum payments, student loan payments and any other debt payments can not exceed 36% of the amount you earn each month before taxes. These ratios are use to determine how much home you can afford or in other words how much money the bank will loan you. Generally speaking, the lower amount of the two calculations determines the amount you qualify for. Now, 28% and 36% are the guidelines but these numbers frequently get increased on both "A" Paper Loans and "B" Paper Bad Credit Home Loans to enable you to buy a more expensive home based on compensating factors. For example, a person on the "A" Paper side might have a very high FICO, like 800. A bank underwriter could look at this person and extend their ratio to 38% and 50%, respectively, because of their strong credit background. On the other side, a "B" Paper bank underwriter might extend your ratios, because you are putting down a large down payment or one of many other compensating factors. Again the key is a good Loan Officer!
The last guideline is down payment. It use to be that you had to have 20% to put down on a home before a bank would give you any money. Now you can get both "A" Paper Loans and "B" Paper Bad Credit Home Loans with no money down. But, remember money speaks very loud. In other words, the more you can and will put down the more favorable loan terms a bank will offer. On Bad Credit Home Loans it is without a doubt the best way to get approved. It has been said many times you can file bankruptcy today and have a bad credit home loan tomorrow if you can put down 50%. Why you ask? Because, you have basically eliminated all the risk to the bank if you foreclose!
Now besides the two markets that Loans fall into, ie. "A" and "B" paper, their are three basic categories of loans. These are Conventional, FHA and VA. The guildelines described above all apply to each of the three categories but there are some differences. For the most part Conventional Loans are the largest category and offer options for everyone from great to poor credit. FHA and VA loans are special categories for unique situations.
FHA Loans are considered first time home buyer loans. These loans have more conditions than conventional loans that you need to meet to qualify but generally they allow you to buy more home. Why is this you ask? The reason is because the ratios used are generally higher to start. FHA ratios are usually based on 29% and 41% instead of the 28% and 36% for conventional loans. Also, these loans are insured by the government. Therefore, the banks have a small amount of insurance against loss if you foreclose on the loan. Explaining how this works is beyond the scope of this lesson but regardless it results in a good situation for many first time home buyers with decent credit. Again, a good loan officer will help you determine if an FHA loan is right for you.
VA loans are specifically for our Military People and Military Veterans. Again the guidelines and conditions needed to qualify for these loans very some from conventional loans but if you do qualify for this type of loan it is definitely one you should consider. Similar to FHA loans VA loans are partially insured so banks offer vary favorable terms on VA Loans. Check with your Loan Officer to see if you qualify.
Now that you have a good understanding of how to qualify for a home loan or a bad credit home loan the most important part is next! This part is titled "Follow The Money!" So far we have stressed finding a Good Loan Officer and this can't be more true. The fact is you will not be able to learn the mortgage industry just for your own home loan or especicially a bad credit home loan. There is just too much variation. But a good Loan Officer will know the industry and the best options for your circumstances. The most important criteria for a good Loan Officer is an honest one! Unfortunately, anyone can be a Loan Officer and to many are not completely honest. We suggest you ask your potential Loan Officer how they earn their money.
Now pay close attention because you are about to learn an industry secret most Loan Officers do not want you to know! Many of you have heard of an origination fee. Incase you haven't this is the fee a bank or mortgage broker charges you to do the loan. The standard fee is 1%. If your loan or bad credit home loan was $150,000 then the origination fee would be $1,500. In addition to the origination fee there are many other fees you will have to pay like a processing fee, a credit check fee and others. So your first thought is, OK I paid the fees needed to do my loan and I paid the bank or mortgage broker a profit of $1,500 for this service. Wrong!!! How many of you have seen banks and brokers advertise home loans and bad credit home loans with no fees and no origination fee? If the above was true they would be doing your loan for free and paying your fees to complete the loan! I'm sure your like me and know that is obviously not true. So how do they make their money and pay the fees? OK, here's the secret, REBATE PRICING!!! What is that your thinking? This is where Loan Officers really make there money and lots of it! See each bank produces daily rate sheets. These sheets state the market rates and the rebate pricing to the Loan Officer for each rate. A par rate is the rate the bank will give you on your home loan or bad credit home loan and pay zero rebate pricing to the Loan Officer. Maybe we can explain this better. Have any of you heard of Discount Points? A Discount Point is what you the customer pays the bank to lower your interest rate. For example if the par rate is 6.25% and you want a 6% rate you could pay 1 point (1 point = 1% of the loan amount) and buy the rate down to the 6%. Well, Rebate Pricing is the exact opposite. On these rate sheets the par rate could be 7% but if the Loan Officer gives you a rate of 7.25% they get a rebate on the .25% of 1 point or 1% of the loan amount. Using our $150,000 loan example the Loan Officer just made an additional $1,500 on your loan and you had no idea. Now to be honest this is highly oversimplified and exagerated. In the real world the amounts can be less and the Loan Officer is usually splitting the total amount with their Broker. None the less you had no idea and instead of getting a loan at 7% your at 7.25% or higher. (Just to clarify a .25% change in rate is not necessarily equal to a 1 point discount or rebate. These numbers are determined buy the bank and vary widely. It could be a .125% rate increase equals a .8673 point rebate or entirely different!)
Before you go off the deep end and demand a Loan Officer gets no rebate pricing let me give you some general guidelines. This is only my opinion but the fair amount a Loan Officer should earn on each loan given the work and industry is between 2% and 2.5 % on your loan. So if your home loan or bad credit home loan amount was $200,000 the Loan Officer's compensation would range between $4000 and $5000. Your probably thinking that is a lot of money, but remember a Loan Officer is a sales person and they have to advertise and prospect hundreds of potential clients for each loan they do. Also, they usually split the total in half with their broker! Therefore, with all this said our advice to you in finding a good honest Loan Officer is to ask them about rebate pricing and how much they will actually earn by doing your loan or bad credit home loan. If they are willing to explain this process and even share the Rate Sheets (this might be against company policy) you probably found a good Loan Officer. More over, it doesn't matter how the Loan Officer earns their commission either with a large origination fee, all in rebate pricing or some sort of split as long as you understand and agree to what is happening!
Now that we have shared all this information you might be asking why we would share this kind of a secret and why you should believe us. Well, we are telling you because you deserve to know how much you pay for any service and because so many people have been excessively overcharged by unscrupulous Loan Officers. Also, like any business we are here to make money and we have done research to find good companies for you to deal with. In return, when you do business with one of the companies we have recommended below, that company pays us a small finders fee. Depending on the company we make anywhere from $10 to $40 but the important thing we want you to understand is we have shared this info with you including how we make our money so you can trust us. Often my first question when dealing with someone new is how do you make your money? You would be amazed at how much you can learn from that question alone. Try it some time and please try the companies we recommend below!
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