Things to Consider Before Getting a Mortgage with Bad Credit

| January 2, 2012

In recent years the mortgage industry has undergone many changes, making it far more difficult for those with bad credit to get a home loan. Due to low interest rates, mortgages were offered to people who could not realistically afford to make their payments. The housing industry suffered a dramatic loss when hundreds of thousands of these loans defaulted. Banks and mortgage companies were forced to reevaluate their lending requirements. Getting a mortgage with bad credit is now more difficult than ever before.

Almost half of Americans have a credit rating that falls into the bad credit range. These borrowers must often work with high risk mortgage brokers in order to finance their home loans. Consumers dealing with high risk lenders must be knowledgeable and diligent to avoid predatory lenders who can take advantage of their financial situation.

Borrowers with poor credit are considered at higher risk of not meeting the terms of their mortgage loan. In order to offset the greater risk they are taking on, high risk mortgage lenders charge a much higher interest rate than a conventional mortgage lender. There are many aspects that are considered to establish the terms and rates of a high risk mortgage; this practice is known as risk-based pricing. The borrower’s credit score is the most important factor. Other considerations include specifics of the delinquencies reported to credit agencies and the borrower’s debt to income ratio.

High risk mortgages differ from conventional loans. They often have a pre-payment penalty, balloon payment, or both. Pre-payment penalties are large fees that must be paid if the loan is paid off before the end of the initial terms, such as when selling the house or refinancing the loan. A balloon payment requires the borrower to pay the remaining balance of a mortgage all at once after a certain amount of time has passed, generally after five years.

Borrowers can improve their chances of getting a lower interest rate and better terms on their loans before ever getting a mortgage with bad credit scores. Lowering credit ratings over time can save tens of thousands of dollars over the life of the loan, and help make payments much lower. By paying monthly bills on time, closing unused accounts, and taking steps to improve debt to income ratio, consumers will improve their credit scores and put themselves into a better bargaining position when dealing with high risk mortgage lenders.

Category: Bad Credit Loan

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