ABC of Bad Credit Lending

By now, nearly everyone is aware of something called a credit score, but most of us have no idea what the score actually means or how it is determined. In fact, the only thing most of us know is that if our score is too low, many home mortgage lenders won’t give the same interest rate as a person with a higher score. The higher the credit score, the more likely someone is to get a better interest rate on their loan.

So What Can a Home Buyer Do?
Obviously, many people have lower credit ratings due to job loss, divorces, health problems, failed business ventures, etc. Others simply have poor credit ratings because they have neglected their obligations to repay creditors in a timely manner.

Regardless of the reason, recognize that there are opportunities to still purchase or refinance your home, but it is just as important to view this as a second chance – a new lease on your financial life, if you will.

Take the time to carefully analyze why you ran into credit problems in the first place, and determine if you will actually be able to make your payments once the loan is granted. If you can reasonably determine that “yes,” you are in better financial shape now than when the credit issues occurred you might want to consider an Adjustable Rate Mortgage (ARM) for your financing option.

By doing so, you will gain the benefit of a somewhat lower interest rate, but it will only be for a short period (usually 2-3 years.) Additionally, most ARM loans have a prepayment penalty that equals about six months worth of interest. The thought process of taking the ARM loan is simple. If the financial problems are behind you and you can demonstrate to the new lender that you have changed your credit patterns, you will be able to refinance at a lower, fixed rate in two or three years. Similarly, you will have the benefit of a slightly lower payment than if you selected a fixed rate payment from the outset.

If, however, you continue to see financially turbulent times ahead such as job uncertainty, marital problems or health issues, you will want to consider a fixed rate payment in order to ensure a consistent amount due each month.

Who Purchase These Loans?
While most of the investors purchasing Sub-Prime loans are non-traditional lenders, recognize that Fannie Mae, a large government sponsored agency, is beginning to move into this lucrative market. As a result, many loans that used to go non-conforming can now go through traditional lenders, which may result in lower fixed rate payments for borrower. Be certain that your lender attempts to sell your loan to Fannie Mae before placing you in a private, Sub-Prime loan pool.

Is it Worth it?
YES! The benefits of owning a home far outweigh a slightly higher interest rate if your credit is less than stellar. Aside from the tax benefits, you gain equity, experience property appreciation and experience the pride that comes with owning your own home. Don’t let credit blemishes keep you out of the game!

By : ABC Loan Guide