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How to get a mortgage if you have less-than-perfect credit

You need a loan, but your credit won’t allow you to get any of those great rates. You’ll be glad to know there are alternatives. In fact, there’s a whole segment of the mortgage industry that only lends to people who, for whatever reason, find themselves with less-than-perfect credit.

Called “B paper” in industry lingo, loans offered include 2/28 and 3/27 loans. The number before the slash refers to the number of years that the initial rate is fixed. After that, the rate changes on a predetermined schedule (usually every 6 months or 12 months) for the remainder of the life of the loan. The amount of the rate change (called an Adjustment) is determined by a mathematical formula based on the U.S. bond market (typically the yield on the 1 Year U.S. Treasury Bill). The 2/28 is usually the best place to start for two reasons, one of which impacts the other. These B paper loans usually have a two-year prepayment penalty, meaning you can’t refinance for two years.

Most A paper lenders want to see 24 months of on-time mortgage payments in order to approve a loan. So, if you get that 2/28 loan with a two-year prepayment penalty, you can put up with a higher interest rate, rebuild your credit, and refinance into a better loan at the end of two years.

B paper is just as competitive as A paper, if not more so. There are plenty of lenders out there, so although you won’t get the lowest possible rate, you also don’t have to pay an exorbitant amount in points on top of the higher rate. (One point is one percent of your loan amount.)

Remember that you’re not only getting a loan. You’re also rebuilding your credit. Think how good your credit report will look two years from now when you have 24 on-time payments behind you. Then you can apply for an A paper loan with confidence.