Mortgage loans for bad credit can help borrowers buy a house, but they can also lead to financial disaster. As with any type of high-risk lending, borrowers are charged a higher rate of interest. This inflates monthly mortgage payments and can add thousands of dollars to the cost of the loan.
The amount of interest assessed on mortgage loans for bad credit is typically based on borrowers’ FICO scores and credit history. Borrowers with FICO scores below 550 generally pay higher rates of interest than those with FICO scores of 620. While both scores fall into the bad credit category a FICO score of 620 is perceived to present a lesser financial risk.
While bad credit mortgages cost more than conventional home loans, this finance option can help debtors buy a home while establishing or rebuilding credit. If borrowers can develop a strong track record of submitting payments on time and in full they can refinance into a conventional home loan within a year or two.
One option for buying a house with poor credit is Home Path Mortgage. Offered through mortgage financier, Fannie Mae, this special financing program is available to buyers who purchase Fannie Mae bank owned foreclosure houses.
HomePath financing options include provisions for borrowers with poor credit. In addition to selling distressed properties below market value, Home Path Mortgage allows borrowers to obtain down payment assistance and offer a low down payment requirement of 3-percent.
When borrowers finance through conventional lenders they typically must provide a down payment of 10- to 20-percent. Home buyers who purchase Fannie Mae bank owned homes in areas hit hard by foreclosure can apply for Neighborhood Stabilization Program (NSP) grants. If awarded, NSP grants can be used toward the HomePath down payment requirement, or to make property improvements.
Individuals who have lost their home to foreclosure or filed for personal bankruptcy within the previous two years face multiple challenges when applying for a mortgage loan. One option to consider is hard money loans offered through investment groups or private investors.
Hard money loans can be quite costly and should be used as temporary financing. Real estate investors often require down payments of up to 50-percent and assess interest rates between 18- and 25-percent. Borrowers who enter into hard money lender real estate loans should strive to refinance mortgages within a year or two.
Borrowers who hold a mortgage note and need to refinance should investigate Obama’s Making Home Affordable program. This government sponsored program is available to debtors with bad credit. However, eligibility requirements state borrowers must be current on their home loan and have not been delinquent with payments by more than 30 days within the previous twelve months.
Making Home Affordable mortgage refinance program is scheduled to expire on June 10, 2010. However, new programs will be offered to help bad credit borrowers save their home from foreclosure. New programs include Making Home Affordable second lien modification and foreclosure alternatives. To learn more about this home saving program visit MakingHomeAffordable.gov.
