Home Loans for People With Poor Credit

Reader Question: I hope to buy a home next year, and if I do I'm going to need a loan to pay for it. I have a poor credit score, but I'm working on improving that. Are there home loans for people with poor credit these days, and if so who offers them?

I have some good news and some bad news for you. Let's get the bad part out of the way first.

Because of everything that has happened to our economy over the last year or so, there are few (if any) mortgage lenders that will give home loans to people with poor credit histories. In fact, this is part of the reason our economy is in such bad shape right now. These types of loans used to be given out all the time. They are referred to as subprime mortgages, since they are given to borrowers with poor credit (i.e., subprime borrowers). The only way lenders could make these home loans affordable was by using adjustable-rate mortgages and deferring the high interest until some point down the road.

Long story short, this type of lending / borrowing practice led to a lot of home foreclosures over the last few years. Some of the lending institutions that specialized in these subprime loans have since collapsed, while others have been reorganized to serve a different business model. So now, in the current economy, there are few lenders willing to offer home loans to people with bad credit scores.

Good News for People With Poor Credit

I said I had some good news for you, in addition to the bad. And here it is...

Whether you realize it or not right now, it's actually a good thing you cannot get a home loan when you have bad credit. As I mentioned above, the only way you could get a subprime mortgage in the past was to pay a ton of interest on the loan. This is what drove a lot of people to bankruptcy and foreclosure -- record-breaking numbers, in fact. So in the grand scheme of things, the absence of poor credit home loans is actually a good thing.

Here's another positive note for you. It's not that difficult to improve a poor credit score. With a combination of financial discipline and good old-fashioned determination, you can improve your credit situation in a matter of months. If you do this first and then apply for a home loan, you'll get a much better interest rate. This translates into a smaller mortgage payment each month, and who doesn't want that?

So my best advice for you is to focus your energy on fixing your poor credit situation first, and then apply for a loan when you're in a better position to do so.