Bad credit mortgage are home loans that is given to people who have a low credit score. This type of home loan is also known as non-traditional loans, since such borrowers are not eligible to get a loan from a traditional money-lender or financial institution.
These type of borrowers fall under the category of high risk borrowers as they do not have a favorable credit history. So, basically even if someone has a bad credit history, they can still get a home loan, if required. One of the most effective ways of building up a good credit record is by taking a bad credit mortgage.
It helps you pay off the loans and bills, which have mounted up and leads you towards having a positive credit record, gradually. Bad credit mortgage is a great way of turning a negative thing, into a positive one in the long run.
Now, getting a loan has become easier for them because Bad Credit Mortgage has come up with a solution to their problems. There are many lenders who provide Bad Credit Mortgages. In case of a Bad Credit Mortgage, a mortgage loan is issued to a person who has a poor credit history or poor credit rating.
Many people are unable to secure a loan from the bank or any financial institution because they had credit problems in the past or they have a poor credit history caused by bankruptcies, defaults, or court judgments. Bad Credit Mortgages finds its application here.
When anyone is making an application for the mortgage, the lender will check particular person’s credit history. Usually, banks and traditional lenders do not wish to lend to people who have no credit history or poor or negative credit rating. Some lenders may be ready to lend, but they will do it at a much higher rate than the standard mortgages because they consider the risk much higher than the average market risk. This happens in spite of the delinquencies being short-term. This kind of mortgage is called Bad Credit Mortgage, Credit-Impaired mortgage, or Subprime Mortgage.
For bad credit mortgage the loan company approaches a borrower with bad credit history with a loan offer. The offer fixes the amount of principal amount, rate of interest and the time within which the borrower has to payback the money. The loan offer comes with certain conditions; the borrower will have to consider all of them, before taking the loan.
Why People have a Bad Credit History?
The reasons for having a bad credit history include the following:
Defaults in payments or arrears in Mortgages: If there is a default in making mortgage repayments as a result of inability to meet the repayment amounts, this will affect the credit ratings of a person.
Decrees or CCJs (County Court Judgments): If anyone has defaulted on making the repayments of a loan or debt and court orders have been issued against him for repaying the creditor, and even after that the concerned person is unable to repay the loan, it will affect the credit rating of that person.
Bankruptcy: Bankruptcy is the state of a person who is unable to clear his debts. If a person is declared bankrupt, that also affects his credit rating. Usually, the credit scores range from about 300 to about 900. Most of the customers range in the credit scores between 600 and 700.
Usually the borrowers who have credit ratings below 620 are often stuck with Subprime Mortgages and the high interest rates applicable with this kind of mortgages. This can be a result of late bill payments or declaration of personal bankruptcy and there is no option other than going for a Subprime mortgage. The interest rates are higher but they are not the same for every Subprime lender because the interest rate depends on a number of factors such as credit score, the down payment amount, and the kind of financial problems that the borrower had in the recent past.
Types of Subprime Mortgages:
The different types of Subprime Mortgages include:
Interest only Mortgages
Pick a payment loans
Initial fixed rate mortgages which transform to variable rates
There is also a clause of prepayment penalty and balloon payment for Subprime loans. These two things can be implemented together also.
A prepayment penalty is a fee that is charged because of early repayment of the loan resulting from either selling the house by the borrower or refinancing the high-rate mortgage loan.
A mortgage with a balloon payment clause requires that the borrower has to pay the whole outstanding amount in a lump sum after a certain period of time, and often that period is fixed at five years. If the borrower is not able to do so, the options open for him is selling the house or refinancing the house.
Both prepayment penalties and balloon payments are related to higher foreclosure rates, but this is often debatable.
But there are some Subprime mortgage lenders who really try to help people who have credit problems through Bad Credit Mortgage. They provide loans at an affordable rate, but the borrowers really have to make an extensive search for them.
Bad Credit Mortgage customers have to be extremely cautious about Predatory Mortgage Lenders. They often try to earn additional profit by cheating the borrowers in various ways.
For Bad Credit Mortgage, major Subprime Mortgage Lenders include New Century Financial Corporation, Ameriquest, Citigroup, Roadloans etc.
Therefore, Bad Credit Mortgage is a commendable way to solve problems of people who have poor credit history.
Last Updated on : 24th August 2013