Bad Credit Mortgages
Bad credit mortgages have been introduced in the mortgage loan market quite recently and have gained immense popularity because of the large number of people with poor credit histories. Previously no mortgage company was willing to cater to the needs of this huge target segment. Even until a few years ago, it was near impossible for customers with poor credit histories to be able to qualify for a conventional mortgage. Bad credit mortgages have been developed to address mortgage financing needs of such customers. Bad credit mortgages are also known as adverse credit mortgages and sub-prime mortgages. Initially, companies providing bad credit mortgages exploited customers by charging exorbitant interest rates and unusually high fees because of the unavailability of other options. Bad credit mortgages are now available with more competitive interest rates, lower fees and easier terms than ever before. Always keep market interest rates as lowest benchmark while shopping for bad credit mortgages. This is because companies providing bad credit mortgages always charge higher interest rates to compensate for higher risk that they undertake. Your first step in getting a bad credit mortgage should be for contacting a mortgage broker who has an established track record in this field. Mortgage brokers can help you to find an affordable bad credit mortgage suited to your specific needs. As with conventional mortgage loans, a thorough research is recommended before choosing a mortgage broker for bad credit mortgage.
Most bad credit mortgage companies charge prepayment penalties that can amount up to six months of interest. However, most bad credit mortgage companies provide the option of buying prepayment penalties at the time of signing up for the loan. Bad credit mortgage works on the principle of adjustable interest rates i.e. your interest rate remains fixed for two to three years and then adjusts with market rates for the remaining term of your bad credit mortgage loan. More and more companies are now offering bad credit refinancing and second bad credit mortgages offering a wider variety of products to customers. Bad credit mortgage customers are primary targeted for mortgage frauds. Consequently you should be extra careful while shopping for bad credit mortgage. Following are some steps you can take to ensure that you are not a victim of mortgage fraud:
- Do not select the cash out of refinance under any circumstances.
- Always be conservative in appraising your home value. You will never get a 100 percent loan to value bad credit mortgage.
- Make sure you have enough money to pay off all closing costs at the time of signing the contract. If you do not have enough resources to pay all closing costs the bad credit mortgage company may charge you an even higher interest rate.
- Try to get bad credit mortgage as soon as possible. Waiting will only lower your home value and narrow down your choices forcing you to settle for a sub optimal option.
- Closely examine all closing costs to ascertain that you are not paying extra charges that will contribute to the loan officer’s personal income.
- Consult a bad credit mortgage officer to examine your home and credit history before getting your hopes up.
Bad credit mortgages are usually of two type i.e. reasonable bad credit mortgages and unreasonable bad credit mortgages. Reasonable bad credit mortgages are mortgage loans to individuals having poor credit history at slightly higher interest rates and closing costs. Unreasonable bad credit mortgages, deemed as more lucrative by lenders, are mortgage loans that charge several extra points and exorbitantly higher interest rates and closing costs. Only comparison shopping allows you to determine which companies are offering reasonable bad credit mortgages and which are offering unreasonable bad credit mortgages. As a result, the importance of comparison shopping for bad credit mortgages cannot be emphasized enough. A common but inaccurate belief about bad credit mortgages is that you have to make a substantial down payment. Companies are now offering 100 percent mortgage financing on bad credit mortgages depending on your individual circumstances and credit history. It is a good idea to defer all credit purchases until after buying your bad credit mortgage. Make sure you have a clear idea of the terms and conditions of the bad credit mortgage before you sign the contract. This is a very common mistake and should be avoided at all costs. Having a fair idea about the bad credit mortgage will allow you to realistically assess its affordability and suitability considering your individual circumstances.
It is a good idea to examine your credit report from all three credit bureaus (i.e. Equifax, TransUnion or Experian) before applying for a bad credit mortgage. It will give you ample time to eliminate errors (if any) from your credit score before applying for a bad credit mortgage. Keep in mind that your credit score is decreased a little every time your credit report is looked at. Thus more bad credit mortgage lenders you will go through before deciding on one lower will be your credit score. Thus it is a good idea to hire a mortgage broker who will apply to various bad credit mortgage companies at the same time enabling you to maintain your credit score. It is also important to know how your credit score is calculated to ensure against future mistakes. Fair, Isaac and Company is the largest credit reporting agency in the country. Most credit bureaus use the FICO credit reporting system to calculate credit scores of customers. If your FICO score is between 500 to 600, you can get a bad credit mortgage loan if you can and are willing to make a down payment. If your FICO score is between 600 to 640 you can most likely get 100 percent home financing with a bad credit mortgage loan. Do not give up if the first bad credit mortgage company you approach refuses your application. This is because your credit score is one of the many parameters a bad credit mortgage company looks at before approving a loan. There are still chances that another bad credit mortgage company will approve your loan application.