Bad credit buyers

Not so long ago, bad credit made it extremely difficult for a homebuyer to obtain a mortgage with a reasonable interest rate. In recent years, technological advances have lessened the stigma for some customers with imperfect credit.

Before, credit was a black-and-white kind of issue: buyers with good credit received the best interest rates (prime mortgages), and buyers with bad credit received higher interest rates (subprime mortgages). This system was based on the false assumption that all people with imperfect credit were more likely to default on the terms of their loans.

In fact, as the industry has now realized, not all bad credit is created equal. In other words, your creditworthiness is not accurately reflected by your credit score only. There are other factors that contribute to your potential to be a good (or risky) borrower.

The process of analyzing those factors is called risk-based pricing. Basically, a computer program weighs your credit score along with factors such as employment history. As a result, two people with identical credit scores could be eligible for very different mortgage rates based on the analysis of these other factors.

It is imperative that you are familiar with your credit history before you begin looking for a mortgage. If it is less-than-perfect, make sure that you consult with a large number of potential lenders in order to get the best rate. A large number of Americans have credit problems, so you shouldn’t feel embarrassed about being honest when you are looking for a mortgage.

Also, keep in mind that people with better credit scores tend to get better mortgages. If you have time, try to repair your credit before you buy a house.