Bad credit mortgage : getting on the property ladder

Bad credit mortgages are a possibility if you're having problems with your credit rating but you want to get on the property ladder. There are plenty of companies willing to offer you a mortgage even if you have a bad credit history. However, just because you can get a bad credit mortgage for your first home, that doesn't mean that you should .

Getting a mortgage for your first property with bad credit is a completely different matter from remortgaging an existing property with bad credit. There are arguments for and against the latter option; see our section on getting a second mortgage for more information. However, getting your first mortgage or loan with bad credit is usually an ill-advised move. For a start, the interest rates for bad credit mortgages are usually much higher than the interest rates offered to other borrowers. But that's not the only reason why it's a bad idea.

The reality of second home loans

The usual reasoning behind getting a bad credit mortgage for your first property is that you will be able to pay off your debts once the value of your new home increases. This is a risky strategy. It is by no means guaranteed that house prices will rise, and even the best economic experts can't predict the future for certain. If you're relying on the magic of house prices to bail you out of debt, you need to think very carefully about the possible outcomes of your decision.

Imagine that house prices double in the few years after you purchase your new home. You now own a property that's worth double what you paid for it. But how do you cash in the value of your home? Remember, you still need somewhere to live. If you sell your home, you may end up spending most of your "profit" on a new place to live, unless you can find someplace that has bucked the trend of rising prices. You could, of course, sell the property and go back to renting somewhere to live. However, this option means getting off the property ladder again. So your best option is to use the equity in your home for a loan to pay off your debts. This may be a cost-effective solution, but it doesn't mean an end to debt; it just means you've now got a second mortgage to worry about.

Now imagine that the opposite happens: house prices take a tumble just after you purchase your new home. You now own a property that's worth less than you paid for it. You're stuck making mortgage repayments, and you still have all that original debt to deal with. You have the choice between selling your house and making a big loss, or sitting tight and paying the mortgage repayments along with your debt repayments.

If you have bad credit, it's far better to deal with your credit problem before you take on the additional burden of buying a property. Of course, it's possible to have bad credit even with plenty of money in the bank, and in that situation it's tempting to steam ahead with buying a property because you know you can afford it. But sorting out your credit rating will help you get a much better mortgage, which means big savings in the long run. Even if your bad credit is because of a $20 phone bill you forgot to pay in 1990, do everything you can to sort out the situation. Repairing your credit rating will put you in a much stronger position to purchase a house.

 

 

 

 

 

 

© AskFinancially.com 2008

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