Reasons You Shouldn't Buy a House with Bad Credit

Although it is possible to buy a house with bad credit, it is very costly. Some lenders will offer mortgages to bad credit borrowers because they make more money in interest and fees than lending to borrowers with good credit. If you are interested in buying a house and have bad cedit, it is better to take the time to repair your credit before applying for a mortgage. Once your credit is repaired, you do not pay high fees in the long run.

Interest Rates are Higher

The interest rates offered to borrowers with bad credit are not the same rates offered to prime borrowers, borrowers with good credit. If you are taking out  a loan for thirty years, an increase in interest rates means higher payments for the next thirty years. That is a long time, and adds up to a large amount of money. If rates for prime borrowers are 5 percent, and rates for sub-prime borrowers are 6 percent, the cost is one dollar per thousand dollars borrowed. For example, a $200,000 house will have a payment of $200 more every month than if you received the prime rate. Over 30 years, that is a whopping $72,000.

Sub-Prime mortgages

Borrowers with bad credit cannot obtain conventional 30 year fixed loans and are forced to take out adjustable rate loans and balloon loans. These types of mortgages will lead to higher payments in the future. Most borrowers will not be able to afford the higher payments and many will default on the loan and face foreclosure.

Refinancing

If you take out a sub prime loan and later have improved your credit score, you will then need to refinance. If you refinance to avoid an ARM adjusting or to lower your interest rate, then you will incur hefty refinance fees. These fees are similar to the closing costs paid at the time of purchase. These fees are rolled into the mortgage and now you have an even higher loan balance than when you purchased the house. Also, you start over again with the term, usually 30 years.

Risk

Bad credit mortgages are risky mortgages. You have a good chance of default, and that is why the costs and interest rates are higher. An ARM can cause your payment to double and become too much for your to afford. Or, there could be a balloon which will require a large sum of money to be paid ten or fifteen years into the mortgage. If you can't afford these changes that will occur in the loan, the home will be foreclosed. It is safer for the borrower to wait until their credit is repaired before they take out a mortgage. Not only will it cost much less money, but you will be more secure and less likely to default on the loan and lose your home.

blog comments powered by Disqus