Mortgage is part of the modern lifestyle. A good percentage of the modern day population can only afford a house thanks to the availability of mortgages. However, it is increasingly difficult to secure a mortgage loan with a bad credit rating. A good credit rating is any rating above 620. Any figure above 650 is generally considered excellent. If the rating is below 620, one may experience some trouble in securing a mortgage or even other simple loan under favorable terms.
First off, as previously stated a bad credit rating is one with a low credit score; generally lower than 620. This of course is a way of predicting the probability of a borrower to not follow through with the mortgage payment to its completion based on the borrower’s loan repayment history and current amount of debt. In other words, a borrower with bad credit rating has a higher credit risk and may fail to pay back the given loan in its entirety within the specified time. However, even if you have had late payments or been declared bankrupt, you shouldn’t worry as there are more than enough bad credit mortgage loans being offered by a number of institutions.
Who should consider applying for a bad credit mortgage?
Of course, if your credit rating is below 620, this is much the only option you have. Also, if you have been declared bankrupt within the past two years or 24 months, the only loan you might qualify for is a bad credit mortgage. A debt to income ratio of more than 50% and an inability to cover monthly family expenses will also make most conventional lenders wary of dealing with you.
How to Choose a Bad Credit Mortgage
If you intend to apply for a bad credit mortgage, you should proceed with caution and go with the best terms from the most reliable source you can get. It is important to acknowledge the fact that many lenders consider such borrowers as desperate and ready to take anything that comes their way. For this reason, they will readily rip you off if you are not careful. So the first and most important step would be to do heavy background research on the company or institution you intend to get a loan from. You may need to enlist the services of a financial advisor if you are not very familiar with the world of finance. If their details look shady or they have lots of negative reviews, it would be better to move on to another lender.
You should also do enough research to know that you are actually getting the best deal available. Find out the available options in terms of number of years of repayment, interest rates and down payment amounts. Some lenders will give an enticing interest rate for the first few years and after that, raise the interest rate consistently. As we said before, it is important to know what kind of company you are dealing with.
Finally, don’t tie yourself in the rat race forever. Getting a bad credit mortgage should not prevent you from refinancing whenever you can to obtain a better loan with better terms. You can do this by improving your credit score and in effect, acquiring the capacity to secure a cheaper mortgage loan. Of course, this may attract some penalties from your bad credit mortgage; but in the long run, you get to save a lot of your money.
Bad credit mortgages or sub prime mortgages are usually offered at higher interest rates as the institution offering the loan takes a bigger than average risk in giving such a loan.
In addition, you may have to deal with severe penalties for late payments or even early payments. A pre payment penalty, as they are referred to, is charged on a borrower for paying off the loan in its entirety before the specified period. This could be the result of a sudden sale of the property, refinancing or the obtaining of a new source of money. Also, you should be aware of the balloon payment penalties. These are imposed by some lenders in the place of late payment penalties and will require you to pay off the entire mortgage loan balance if and when a previously specified payment period passes. This could easily result in the borrower losing the property.