You have a poor credit score but dream of owning a home. You have approached the banks but they have rejected your applications multiple times.
However, home ownership may not be such a farfetched dream because there are lenders who specialize in Bad Credit Mortgages, that is to say, they will give loans to people such as yourself, people whose credit rating means banks do not consider them ‘creditworthy’ because of the risk of default.
You happily engage with your mortgage broker to see if your home ownership dream can come true, and he is only too happy to point you in the direction of such lenders.
But, before you put your signature on that dotted line, it is important that you know the advantages and disadvantage of taking Bad Credit Mortgage.
Advantages of Bad Credit Mortgage
The major advantage is that with Bad Credit Mortgage, you do not have to worry about the late rent/credit card payments, defaults on loans or anything that made your credit score go bust. The lenders already know you are a high-risk customer and have put into place ways to protect their money case you do default. This is not to say that they will not look into your future ability to pay the loan, it is just that your past will not factor into their decision making that much.
Bad credit loans are good for getting your credit score back up. If you make your payments on time, it will reflect positively on your credit score. Ask for an adjustable payment schedule to ensure that you do not default on the payments.
Another positive aspect is that the probability of the lender turning down your application is low. Up to 90% of bad credit applications go through. You can borrow significant amounts of money but be careful about the borrowing, bad credit loans are expensive.
Disadvantages of Bad Credit Mortgage
The major disadvantage of Bad Credit Mortgage is that the Interest rate is high, higher than the interest charged on normal loans. The lenders use ‘risk-based pricing’ to calculate the interest rates applicable. The higher the risk, the more you will pay as interest.
Be wary of unscrupulous people who position themselves as lenders. You may deal with such an individual and put yourself in a worse position than you previously were. That is why it is important to deal with a reputable mortgage broker or lender. Do your due diligence, research the companies and make sure they are above board.
Like a drug, quick access to loans can be addictive. This could lead to a vicious cycle of debt. Take short term bad credit loans and try to pay them off as quickly as possible. Once your credit score has improved, consider getting out of the loan by making lump sum payments, although this could attract a penalty, or reducing the payment time. You can then apply for a normal loan that has better interest rates.
Exercise caution when taking a Bad Credit loan, you do not want to lose your newly acquired home due to an inability to make the monthly payments.