A Guide to Bad Credit Mortgage Lending

Bad credit mortgage lending makes up a large portion of the mortgage industry. There are many different lenders that specialize in lending money to those that have bad credit scores. Here are a few things to consider about bad credit mortgage lending.

Subprime Lending

The area of the mortgage industry that focuses on bad credit individuals is known as subprime lending. If you are an individual that has a low credit score, you are considered to be a subprime borrower. This means that you will not be able to work with traditional lenders and you will have to focus on subprime lenders instead.

Credit Scores

In order to determine if you are a subprime borrower, lenders are going to look at your credit score. In most cases, if you have a credit score that is less than 680, you are going to be considered a subprime borrower. Every lender is going to have a different score criteria and for some of them the cutoff will be 620 to 640. 

Interest Rates

When you have bad credit, you should expect to have to pay higher interest rates for your mortgage. When you have a low credit score, this means that you are a risky borrower to work with. The lender is essentially going to be investing in your ability to repay the loan with interest. One of the basic rules of investing is that if you take on additional risk, you need to be compensated fairly for that risk. Because of this, banks are going to charge you more money to work with you. They know that a certain amount of people in this credit range are going to not be able to pay back the mortgage. The lenders have to charge more in order to compensate for the borrowers that go into foreclosure.

Terms

Many times, in this area of mortgage lending, you are going to find alternative loan terms. You may not be able to find a mortgage that is going to give you a fixed interest rate and payment for 30 years. Many subprime lenders offer adjustable-rate mortgages in order to make the payments more affordable for their clients. If you agree to an adjustable-rate mortgage, you need to understand that there are some risks involved. The interest rate on this type of loan is going to be tied to a financial index. If that index increases substantially, your payment could increase as well.

Many times, they will also offer interest only mortgages. Interest only mortgages can be very dangerous to the borrower because you are only making a payment in the amount of the interest each month. This means that the principal of the loan is never been addressed. Then at the end of the loan, you are going to have to make a balloon payment that will cover the balance of the loan. At that point, many homeowners find themselves in trouble financially.

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