Understanding Bad Credit Mortgage

Do you want to buy a home but your credit rating is too low for the banks to give you a loan? Then you may want to consider applying for Bad Credit Mortgage.

Lenders offer Bad Credit or subprime Mortgage to people whose probability of defaulting is high due to low credit rating. The loans attract a higher than normal interest rates to protect the lenders against the risks associated with defaults. Lenders use risk-based pricing to determine the mortgage rates thus the higher interest charged. The lower your credit rating, the higher the interest you will pay.

How can you make your dream of owning a home a reality despite your low credit rating?

Most banks shy away from giving loans to people with low credit ratings, there are however lenders who specialize in Bad Credit Mortgage.

Do not navigate the process on your own, use a mortgage broker to help you get for a good deal. Mortgage brokers are the link between lenders and borrowers; look for a certified one with a stellar reputation.  The mortgage broker will be privy to your financial capabilities and find the best lender for you. They will broker a good deal for you because their fee is dependent on what they negotiate for you.

Do not take a long-term Bad Credit Mortgage. As advised above, interest rates on Bad Credit Mortgages are very high. Take a short-term loan to give you time to build your credit and perhaps get a more affordable loan. Request for mortgage payments that are adjustable, to make them more manageable.

In an effort to improve credit ratings, individuals may decide to pay off the bad credit mortgage at once, as opposed to the initially agreed upon monthly payments. Please note, lenders make their money from the interest charged and you may therefore incur some penalties.  One such penalty is the pre-payment penalty, a fee charged to the homeowner for paying off the loan before the end of the loan period.   

Balloon payment means the borrower will have to pay off the loan in one lump sum after a specified period. This can prove to be tricky for some people who may not be able to raise the required amount. In this case, the homeowner may lose the house or have to look for a way to refinance the loan. To qualify for a bad credit mortgage your credit score has to be below 620, delinquencies of 30-60 days on mortgages in the past year, bankruptcy or foreclosure in the past two years, income to debt ratio of over 50% and an inability to cover living expenses within the month.

In conclusion, having poor credit ratings does not mean you cannot become a homeowner, talk to your lender and see if you can qualify for a Bad Credit Mortgage. Use an experienced Broker with a good reputation to help you negotiate the best rates. Also, remember to keep the loans short term due to the high interest rates. Make sure, you get a lawyer to look at the documents before you sign anything.