Before you apply you need to put together a plan to get yourself into the best possible financial position in order to get the best possible rates for your new mortgage. Bad credit mortgages are available however your credit score will directly effect how expensive your mortgage will be.

FICO Scores

When you apply for a mortgage your lender will make an inquiry to the three credit reporting agencies, Experian, Tran Union, and Equifax. Your mortgage lender will take the middle score or take an average of the three to underwrite your loan. It is a good idea to know what these scores are before you begin the loan process. If there is a problem it is best that you find it first and take the necessary steps to have it resolved before your mortgage lender puts your package together.

Looking At Your Scores

Equifax has your “real” credit score. The scores held by Trans Union and Experian are calculated using a proprietary process and will be different than Equifax. Only Equifax applies the FICO model to its data and therefore the other two agencies may have different data as well as mistakes. Lenders require reliable data and will use all three scores regardless. It is best to get all three of these reports and clean up mistakes and calculate an average in order to have a realistic view of what your lender will be using to determine your interest rate.

Revolving Balances

Revolving balances such as those created by credit cards are said to be necessary in order to show responsibility with debt. Many people believe that if they have kept up their payments, regardless of their balance, it will have a positive effect on their credit score. This is not necessarily true. Maintaining a balance that is too large can reduce your score considerably as it increases your debt to income ratio.

Your plan should include a rigorous effort to lower your overall revolving balances. The FICO model will place your revolving credit into one of five levels. These levels are determined by what percentage of your available credit you have used and are making payments on. These levels are 20%, 40%, 60%, 805, and 100% of your available credit. The lower the level you are on the higher your score will be. Therefore you should try to get this level down to 20%.

Examining Your Credit Reports

When examining your three credit reports you need to look at every entry very closely. Don’t assume for a minute that because it is in writing on your report it is accurate. Cross reference each record with your personal records such as monthly statements. I have heard of cases where information in the report is that of someone’s child who happens to have the same name, or information that is many years old and out of date. There have even been reports of data that just appears out of nowhere for no reason or perhaps because of an incident of identity theft.

Repairing and Removing Negative Data

Be aware that information that is over seven years old can and should be removed. You may also find duplicate data entries, both contributing to your overall score even though one is just a copy of the other. When a collection is ordered the reporting period begins when the first missed or late payment was due. Many times a collector will “reset” the clock either by accident or for some other reason causing the issue to continue being reported beyond its seven year limitation. Also, when a collector sells your case or returns it to the original lender, reporting should stop however this step is often overlooked.

Verifying Positive Data

Sometimes even the positive data can be missing or wrong which can also lower your overall credit score. Make sure that your credit limits are correct as well as the dates on which you opened your account. If your credit limit is listed as lower than it really is this it will increase your revolving credit percentage level. If the date you opened your account is recorded as later than when it was really opened it will look like the account is new and this too will lower your overall score.

A Few Tips

While repairing your credit for your loan whether it is a bad credit mortgage refinance or a new subprime mortgage, you do not want to make any large purchases before applying. This increases your revolving credit level and lowers your score. Wait until you are done with the mortgage loan before spending large amounts of money. Even if you have just come into an inheritance, you need to be mindful that the credit agencies will not be aware of you new found wealth and may see the large expenditures as frivolous behavior.

Mortgage brokers have a tool that you can use called a rapid rescore. With this tool you can show documentation regarding dates, credit limits, and balances, as well as proving negative data are erroneous or out of date. Your mortgage lender will then submit this new information to the credit agencies after which they are required to recalculate your score in three days. This service is not free however, the small fee may well be worth a lot of money in terms of the interest you will be eligible for with a higher credit score.

Your New Credit Score

In order to maintain a great credit score you do need to have a revolving balance. Yes, your score is determined by how much you owe in relation to how much you can potentially borrow however, having no history of balances being paid off on a regular basis can be seen as a lack of experience in managing debt. Therefore, after your credit is repaired you will also need to build positive entries in order to make your score the best it can be. This should be done as soon as possible because when new accounts are opened your score will fall for a spell until you have created a history of timely payment.

Getting a mortgage with bad credit is easy, however, getting the best deal possible by taking precautions and making the effort to get your credit score as high as possible is a bit more difficult and time consuming. The bottom line though is that your efforts will save you money.

A bad credit mortgage company relies on a credit score provided by one or all of the credit agencies to determining where a borrower sits on the line between high-risk and low-risk. Equifax, Experian, and Trans Union keep track of each persons credit history and give individuals a score derived by several factors. These factors include not only payment histories of each credit card and loan but also how many inquiries have been made to view the individuals report.

In the past mortgage companies would not touch someone with a score below 620. Today that number has dropped to 500 which is pretty bad. The fact that an individual is a higher risk gives the mortgage lender incentive to charge higher interest rates and demand that the borrower pay PMI, a form of insurance that guarantees the lender won’t lose out if the borrower defaults. Higher interest rates and payment insurance make bad credit mortgages a profitable venture.

Companies are doing so well in fact that they often offer incentives such as instant pre-qualification, easy application forms and instant approval via the internet. They are everywhere online. Websites can automate many of the processes necessary to the approval process which makes it a hands off job for the lenders.

Companies that offer bad credit mortgage loans definitely exploit the automation capabilities of the internet and some use unscrupulous tactics to reel in those would be borrowers who are either on the fence or just shopping around. Fear tactics such as a great deal that will only last for the next 24 hours (of course the same deal is there a week later).

If you are looking for a mortgage online, shop around, don’t be swayed by the scare tactics and read the fine print. It is also very important that you know what your credit score is. It makes sense to first put in some effort to do whatever possible to bring your credit score up as much as you can before applying. Bad credit mortgage loans are not all that hard to get but be forewarned, many of these bad credit mortgage lenders will try to squeeze whatever they can out of you with the justification that you are a higher risk to them.

If your intent is to build equity as a first time home owner and your credit is not up to snuff, you would be much better off taking care of your bad credit first. Bad credit mortgages can be very expensive and after years of payments you may find that the equity you have accumulated is not what you had hoped. This is because you have been paying the gigantic interest that is associated with these types of mortgages.

On the other hand, if you have accumulated a huge amount of debt but have already built up a significant amount of home equity, a second mortgage could be taken out in order to pay off several high interest debts. This usage of a bad credit mortgage makes more sense.

In either case, refinancing down the road is always an option. Of course you should focus on repairing your bad credit. This can be done contacting the credit reporting agencies and getting a copy of your personal record from each. You can then review them line by line and begin the process of getting rid of false entries or eradicating the negative marks. This can be a daunting and painfully long process but with a strong resolve and perserverance it can and should be done.

Keep in mind that the average mortgage will be with you for 30 years and as such you should have some sort of master plan. Accumulating your own equity is always a better choice than donating to someone elses which is what renting is. Even with a high interest mortgage you will still be accumulating some equity and if your are careful with your finances, pay on time, and take the steps necessary to bring your credit score up, you will find yourself in a better position for sure.

It all depends on your personal situation. Bad credit mortgages, though more expensive, will still earn equity and you can always seek out refinancing. However, if you can’t afford the down payment it may be better to keep on renting for a while longer and focus on getting your credit together first.