Overview

To find a mortgage loan for people with bad credit, you may need to be a bit more dedicated in your search. There are a large variety of programs out there – and that is part of the problem. There are varying degrees of bad credit. You want to get the best possible deal you can qualify for – not just any bad credit mortgage. You may even discover that you don’t need a bad credit mortgage. You want to go into the process prepared. That way you can ask the right questions, find the right loan product and hopefully get an interest rate you can live with.

Types of Loans

With the recent crackdown on subprime mortgages, it will take a little more digging to find a good loan product. It will be important to research as much as you can on the types of bad credit mortgages.

• ARM Bad Credit Mortgages – Most of the mortgage loans for people with bad credit are adjustable rate mortgages. These can be helpful to get into a loan at a lower payment in the first few years. However you must be careful to know before you sign your paperwork how much the mortgage can adjust. You don’t want your payment to double after the first few years of your loan. Look for 2/28 and 3/27 loans when researching this type of loan.
• Longer term fixed mortgages – There are some programs that offer a fixed rate loan but at a longer term like 40 or 50 years. These loans have the added security of knowing that your payment will not increase. However, because the term is longer you will end up paying well over an extra $100,000 over the life of the loan on an average mortgage amount.
• Low document mortgages – If you do not have a lengthy credit history or if you have other documentation issues, you may be able to find a “stated income” or “low doc” loan. These will typically have higher interest rates but can get you into a house and help you begin earning equity.

Mortgage Lenders for People with Bad Credit

Once you have a fairly good idea of the kind of loan that you think will fit your needs, it’s time to look for a lender or broker to help you find the best terms. Since your lender or broker will be your advocate, make sure you can find someone you feel comfortable working with and someone who will keep in contact with you throughout the process. Rely on referrals from friends and family or your real estate agent. You can also shop for a loan online if you feel very confident in the kind of loan you need and a good estimate of the kind of interest rates you should be getting for your credit score.

Regardless of how you find your broker, make sure you get a 2^nd and 3^rd opinion. Always shop around.

Preparing for the Application

Have all your documentation together ahead of time – bank statements, pay stubs, income tax returns and W2’s. Make sure to document any credit history issues so the lender can understand the reason for the late payments or other issues. Be as honest and straightforward as you can. You may also wish to provide a list of any credit references not on your credit report. For example, if you rented an apartment for a long time and always paid on time and that does not appear on the report, have your landlord write a letter of reference that you can include in your application.

Summary

Knowing your credit score and the kind of loan that will fit you the best is half the battle. When you know in advance what kind of product will work best for you, you will be able to comparison shop more easily and not be swayed by a quick pre-approval.

In the next article, we will be discussing car loans for people with bad credit.

Bad Credit Loans | Part Three: Car Loans for People with Bad Credit

For reference, the entire series of articles is listed below.

Bad Credit Loans | Part One: Loans for People with Bad Credit
Bad Credit Loans | Part Two: Mortgage Loans for People with Bad Credit
Bad Credit Loans | Part Three: Car Loans for People with Bad Credit
Bad Credit Loans| Part Four: Personal Loans for People with Bad Credit
Bad Credit Loans| Part Five: Bad Credit Refinance

photo credit: rutlo

When you shop – ultimately you’re shopping for the best loan, but you also want to find a bad credit mortgage lender that you can work with. This process can take 30-60 days or sometimes longer, so be sure you are working with someone who will follow through, and who you can get along with.

Online Mortgage Lenders for Bad Credit

There are some plusses and negatives in shopping for a bad credit mortgage online. The drawbacks are that it’s much harder to build up a personal relationship with the person on the other side of the internet. If you can, try to make some kind of personal contact via phone. If that isn’t possible, try to build a rapport over email. Ask them if they like their job and how long they’ve been doing this type of work. Ask them to share with you their funniest story relating to finding someone a bad credit mortgage.  If you can build a personal relationship, then shopping for a bad credit mortgage lender over the internet can be a great way to go.

The plusses are that you can quickly compare a lot of different loans, apply online and get feedback instantly. You can use their online tools to determine how much you can qualify for and what kind of interest rates you can expect to get. You can also track your application’s progress online and in most cases, the response time is fairly short.

Brick and Mortar Mortgage Lenders for People with Bad Credit

Applying for bad credit mortgages can be a time consuming process, and often there are a few times when you have to meet with your broker. Having someone local that you can work with can be an asset – if you can find someone you enjoy working with. It’s particularly nice to be able to pick up the phone and make a call if you have a question – and to know you are dealing with a real human being instead of an automated system.

Make sure you ask what kinds of loans they handle. Some brokers specialize in subprime loans, while others are FHA and Fannie Mae approved brokers. The more types of loans your broker or lender can offer, the better chance you will have of finding a loan that meets your needs.

Finding a Mortgage Lender for People with Bad Credit

Ask your friends and family members for referrals – who did they go through when they purchased their home? Ask co-workers and other people you see on a semi-regular basis, like at your child’s school  or little league. Often your real estate agent will have a long list of people they can refer you to.

You can also do a search online and compare rates and information from various companies. Be sure to find out exactly what kinds of loans they are authorized to present and always read the fine print. If you need an added layer of security, never hesitate to take your paperwork to your attorney to have him review it before you sign anything. Mortgages will cost you hundreds of thousands of dollars – spending a few hundred to make sure you aren’t missing any important details can be well worth it.

In the last article of this series, we will be discussing how to get the most out of mortgages for bad credit.

Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit

Here is the list of all the articles in this series:

Ins and Outs of a Bad Credit Mortgage | Part One: What are Bad Credit Mortgages?
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Ins and Outs of a Bad Credit Mortgage | Part One: How Much of a Bad Credit Mortgage Loan can you Qualify For?
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders
Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit

photo credit: woodleywonderworks

2/28 Loan and Variations

The 2/28 loan is a loan that has a lower rate for the first two years and then increases at the beginning of the 3^rd year. There is also a 3/27 and 5/25 loan which function in a similar way – with a 3 year low rate then adjusting over the next 27 years, or a 5 year low rate adjusting over the next 25 years.

With these 2/28 type loans, the rate can increase as much as 6 percent. The idea behind this loan is to have borrowers improve their credit during the first two years and then refinance before the rate adjustment. With this type of loan, be careful to read the fine print. Often there are hefty pre-payment penalties for refinancing too soon. Also, carefully consider whether or not you will be able to repair your credit within 2 years. There are also additional costs in refinancing – make sure you are prepared for those if you choose a 2/28 loan.

Interest Only Loans

The idea behind an interest only home mortgage for people with bad credit, is that your payment amount covers only the amount of interest due each month, postponing principle payments. This kind of loan will keep your monthly mortgage payments smaller, allow you to qualify for a more expensive house and lets you repay your principle based on your own schedule.

However, there are big drawbacks to this type of loan. Because you are not paying down the principle, you are not building any equity. If the real estate market takes a downturn, which it has in many places, and your house loses value, you may have to pay to sell your home. The biggest drawback is that you do have to pay the principle eventually – and many people have a difficult time making payments over and above the required interest-only payments. Only consider this kind of loan if you can set up a regular principle payment (automated payments work well for this) or if you are expecting a large windfall – inheritance, regular bonuses at work, etc. with which you can make the principle payments.

Longer-term Fixed Rate Loans

Traditional fixed rate loans are over a period of 30 years. Newer loan programs offer a fixed rate mortgage for people with bad credit for a longer period of time, such as 40 or 50 years. The good thing about these loans is that the rate is fixed – there will be no surprises about your payment. The drawback is that by amortizing your loan over such a long period of time, you will be paying a substantially larger amount of interest.  As a comparison, a 250k loan at 7 percent will cost you $146,399 more over the course of the loan at 40 years instead of 30 but would cost you about $100 less per month. This kind of loan can be a good option if you expect to be able to pay more toward the principle on a regular basis thereby cutting down the loan term.

80/20 Mortgage Loans

If you don’t have much, or any down payment, you may be able to qualify for a first and second mortgage combination. The first mortgage is 80 percent of the home’s value and the 2^nd mortgage is 20 percent. This type of loan generally helps you avoid mortgage insurance since the first mortgage is 80 percent or less. Rates on these types of loans are generally higher because there is zero down payment. This kind of loan can be a good option if you don’t have the money for a down payment but you can afford a higher monthly payment.

No Documentation or Stated Income Loans

These kinds of loans require far less documentation and are easier for people who do not have the traditional documentation required for loan applications. These kinds of loans have some of the highest interest rates, sometimes several percentage points above traditional mortgages.

Summary

Each of these loan types have their purpose. Consider your particular situation and know which of the above subprime / bad credit mortgages would work best for you and let your mortgage broker know. Be careful not to get talked into a program that won’t fit your needs or that will make your finances difficult to manage. The best way to go about a bad credit mortgage is to work to improve your credit as you build equity in your home, so that ultimately you have some equity in the bank and an improved credit score. That won’t happen if you take on a loan that is a bad fit for your situation.

In the next article, we will discuss finding mortgage lenders for people with bad credit.

Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders

Here is a list of all the articles in this series:

Ins and Outs of a Bad Credit Mortgage | Part One: What are Bad Credit Mortgages?
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan can you Qualify For?
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders
Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit

photo credit: rutlo