Improving your credit score can save you from losing your home

The housing market was hot 2-3 years ago and many first time home buyers with lower credit scores in the 580-599 range bought homes with 2 year higher interest rate arm loans. In the last year or so, these arm loans are adjusting to the full rate market rate in the 10-12% range and borrowers who could not refinance to a better program are not making their payments and many homes are going into foreclosure. As a result, lenders are tightening up their guidelines and today you may not get a zero down loan with a credit score below 600. Many loan officers did not do a good job of explaining the pitfalls of these programs a couple of years ago and now the homeowner is paying the consequences, but there is good news. You must get on the road to homeownership early in the process so you can improve your credit to qualify for an excellent first time home buyer program. I encourage people with less than perfect credit to run a mortgage credit report and seek a consultation from an experienced loan officer at least 6 months-1 year before buying a home. You may be only 20-30 points away from qualifying for a great loan which usually requires a 600 credit score. FHA doesn't even have a credit score requirement but if you have had credit problems in the past, you will need to have a very good payment history on at least 4-5 accounts in the last year. Let's take a look at an example which a borrower is purchasing a $200,000 home and they have 2 loan options based on a 599 credit score. The first option is a sub-prime 5 year adjustable rate mortage loan, 5% down payment, 9.50% rate and the second option is an FHA 30 year fixed program, 3% down payment, 6.00% rate. The payment on the sub-prime loan is $1,504 interest only and the payment on the fha loan is $1,199 which is a $300 month difference in payment and you will not be paying off any principal on the sub-prime loan because only interest payment is required. You could refinance this loan into a more traditional mortgage after 1 year as long as you make your mortgage payment on time and you pay off any collections and/or judgements. The problem with this scenario is the fact that most people who take this loan program have $5,000-$10,000 collections which they didn't have to pay off to qualfiy for the sub-prime loan and they don't make a dent to pay off these account during the next year and they can't refinance into a "good loan." Now, they are stuck and they fall behind on the high interest only mortgage payments and they are forced into foreclosure proceedings. Don't get a band-aid loan and take on more debt just to buy a home because you think you need to be a homeowner right this second. You could pay thousands of dollars more in interest and you may lose your home. So, please do your homework and contact a real professional early in the process and clean up your credit to qualify for a great loan program.