Getting a Mortgage Loan with Bad Credit

No doubt you’ve heard it before: People with a credit score less than 680 are less likley to get a mortgage – but that’s not necessarily true. Sure enough, people with a score less than 600 wouldn’t get the lowest interest rate, but buying a home isn’t necessarily out of reach.  There are ways of getting a mortgage loan with bad credit history.

Subprime mortgage loans, characterized by higher interest rates, are available to people with blemished or limited credit. Simply put: People with poor credit don’t have a positive payment history and are at higher risk for defaulting on loans. Lenders want to make sure they are repaid, and subprime lenders loan money to people with poorer credit and balance the risk of not being repaid with a higher interest rate.

For instance, take the case of a poor-credit borrower who wants to buy a $200,000 property and with only $10,000 down.

That’s a double whammy for a lender; a poor credit score and a low down payment, or loan-to-value. Statistically, people who are willing to use their own cash as a down payment are less likely to default on a loan – that’s very attractive to lenders.

Then, factor in borrow’s debt-to-income ratio, or the debt divided by the monthly income. If the ratio is 50 percent or less, and the credit score above 550, then a loan is likely to be approved. However, when the higher interest rate kicks in, the monthly payments are likley to be much larger than for someone with a better credit score.

But there are two proven ways to avoid large mortgage payments.

Take out two loans instead of one if you’re not putting much money down; the total payments are likely to be less than if you borrowed one large sum.

Accept an adjustable rate mortgage; a two-year ARM, offered by most subprime lenders, will likely eqaute to a 5 or 7 percent interest rate.

Or do both; split a mortgage and accept an adjustable rate on the first mortgage, take out a conventional mortgage for the second loan and keep more money in your pocket.

Related Posts:

• Mortgage Loans for People with Poor Credit