Despite bad credit, there are still many good mortgages available, and if you plan it correctly you can still save money on your mortgage payments.
Good credit consists of a 680 credit score better. If you fall lower than this category consider your loan to be placed in 'subprime' lending. Financial institutions have 2 categories, A paper (conventiona) for good credit, and subprime for lower credit. Banks consider low credit borrowers to be a higher risk, so A subprime loan is basically the same loan as a conventional at a higher interest rate to offset the risk.
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The typical way a borrower with bad credit would plan to improve their situation is to purchase a home with a bad credit loan. There are three major items on your credit report that boost your score. A home purchase, a car purchase, and a few credit cards. With no blunders or late pays, these three items alone make up a perfect credit scenario. Once you get into the home, there are many ways to improve your credit. Once you get your credit into the 680 area, (or high enough to make at least a 1-2% decrease in interest rate) its time to refinance.
It is important to note, that to be extremely safe using this method, you're finances have to be back on track. You must be able to afford the home with a high interest rate and all of the bills you have. ONE 30 day late payment can really lower your credit score significantly, and everything you've been working for needs to be started again. So make sure you're financially sound and able.
Another way to save money on your mortgage with bad credit, is with a sizable down payment. 10-20% down lowers your risk and also lowers your loan balance. A smaller loan balance means smaller monthly payments.
Once you know the price range, seek out the help of a Real Estate Agent, look around in your neighborhood, tell your friends and family. Get the word out. Your first purchase may not be the home of your dreams, you may need put in some elbow grease and fix it up. These are PERFECT first time starter homes. When you're ready to sell, you will profit from the work you've done.
I would suggest a 5 year ARM loan. This loan has a fixed rate for 5 years, then adjusts after the 5th year. 5 year ARMS typically have lower interest rates.
NOW its time to fix your credit. Give yourself a good amount of time, about a year to get the entire process complete, but start right away, and MAKE SURE to make ALL of your payments on time. A year of improving your credit score plus improving your starter home to bring it up to market value can really make a lasting change in your life. Two years of paying all of your bills on time will also improve your credit if you do nothing else to work on it.
After the 1-2 year period, you can either refinance into a better rate and a lower payment, or sell your improved home for a profit, which can be put right into your next home, one more to your liking. (Look up 1031 exchange to avoid taxes on the profit of your first home)
To give yourself a double boost combine these two methods. Choose a lower cost starter home, under market value and add a 10-20% down payment. You can seek down payment assistance such as The Nehemiah Program or Ameridream. They help first time home buyers get the down payment they need to purchase a home.
If all goes well and you're REALLY on top of your bills in the first two years, you can come out shining, with good credit and a healthy profit on your first home.
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