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The ABC’s of Bad Credit Lending
By now, nearly everyone is aware of something called a
credit score, but most of us have no idea what the score
actually means or how it is determined. In fact, the only
thing most of us know is that if our score is too low, many
home mortgage lenders won’t give the same interest rate as a
person with a higher score. The higher the credit score, the
more likely someone is to get a better interest rate on
their loan.
When that happens, the loan goes to a Sub-Prime, or
non-conforming, lender that specializes in making loans that
are higher risk based upon various credit factors, such as
bankruptcies, foreclosures, judgments, collection accounts
and other types of blemishes. Depending upon the severity of
the credit issues, a lender will assign a letter grade to
the credit, much like a test score. Obviously, “A” would
indicate the strongest credit profile while a “C” or “D”
credit grade would indicate serious credit issues.
So What Can a Home Buyer Do?
Obviously, many people have lower credit ratings due to job
loss, divorces, health problems, failed business ventures,
etc. Others simply have poor credit ratings because they
have neglected their obligations to repay creditors in a
timely manner.
Regardless of the reason, recognize that there are
opportunities to still purchase or refinance your home, but
it is just as important to view this as a second chance – a
new lease on your financial life, if you will.
Take the time to carefully analyze why you ran into credit
problems in the first place, and determine if you will
actually be able to make your payments once the loan is
granted. If you can reasonably determine that “yes,” you are
in better financial shape now than when the credit issues
occurred you might want to consider an Adjustable Rate
Mortgage (ARM) for your financing option.
By doing so, you will gain the benefit of a somewhat lower
interest rate, but it will only be for a short period
(usually 2-3 years.) Additionally, most ARM loans have a
prepayment penalty that equals about six months worth of
interest. The thought process of taking the ARM loan is
simple. If the financial problems are behind you and you can
demonstrate to the new lender that you have changed your
credit patterns, you will be able to refinance at a lower,
fixed rate in two or three years. Similarly, you will have
the benefit of a slightly lower payment than if you selected
a fixed rate payment from the outset.
If, however, you continue to see financially turbulent times
ahead such as job uncertainty, marital problems or health
issues, you will want to consider a fixed rate payment in
order to ensure a consistent amount due each month.
Who Purchase These Loans?
While most of the investors purchasing Sub-Prime loans are
non-traditional lenders, recognize that Fannie Mae, a large
government sponsored agency, is beginning to move into this
lucrative market. As a result, many loans that used to go
non-conforming can now go through traditional lenders, which
may result in lower fixed rate payments for borrower. Be
certain that your lender attempts to sell your loan to
Fannie Mae before placing you in a private, Sub-Prime loan
pool.
Is it Worth it?
YES! The benefits of owning a home far outweigh a slightly
higher interest rate if your credit is less than stellar.
Aside from the tax benefits, you gain equity, experience
property appreciation and experience the pride that comes
with owning your own home. Don’t let credit blemishes keep
you out of the game!
Here are our recommended sources for Bad Credit Mortgage Companies online:
Top Recommended Mtg Lender
For People With Credit Problems
-Updated 2008-:
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