A low credit rating is generally thought to be enough to kill any real possibility of getting approval on a loan. But that is not completely true, with millions of applicants for loans of all sizes approved each year. Even the chances of getting a mortgage loan with bad credit are still quite high, with little in the way of problems so long as the detailed criteria is met.
Of course, there are always ways around the hurdles presented by some of the criteria specified, but whether looking for 80% or even 100% loan financing, it is important to know that the lending industry has become more open to applicants with low credit scores. It really comes down to making the right approach to the right lender.
The most likely contender in the lender options stakes are sub-prime lenders, who are recognized specialists in loan products for bad credit borrowers. There are both and positives to dealing with these lenders, and negatives. But overall, they have helped to make commercial mortgage loans attainable for practically everyone.
Why Sub-Prime Deals are Good
The advantages with going to a sub-prime lender to get financing to purchase a home really come down to accessibility and loan structure. While approving mortgage loans with bad credit give traditional lenders the shivers, these experts have developed deals that benefit both sides of the transaction. So, it is hard to find a better option.
They are also the only realistic chance of securing 100% loan financing. This is because banks always draw a stern line somewhere, usually seeking a substantial down payment as a gesture to secure their trust. However, sub-prime lenders have recognized that the chances of saving a down payment of $10,000 or $20,000 are slim when credit scores are also being handled.
Instead, using that money to establish a steady habit of mortgage loan repayment is seen as a better option. Also, offering a 100% finance deal means that private mortgage insurance can be avoided, which is another unwelcome expense as far as borrowers are concerned.
The Negatives of Sub-Prime Deals
The main problem with sub-prime lenders is that the deals they offer are usually accompanied with high interest rates. No one expects to get a mortgage loan with bad credit and secure the lowest interest rates, but the overall cost can be quite a bit over the normal.
When applied to 100% loan financing, this means that borrowers face the maximum repayments. With a 10% down payment, a $250,000 mortgage becomes a $225,000 mortgage, so the monthly repayments are lower. But total financing means more pressure and a greater potential to default.
Still, lenders have thought of a solution. They are willing to negotiate longer term mortgage FHA Loans Houston so that the monthly repayments can be kept reasonable. This seems to be a great idea for the borrower, but the compromise made is that the amount of interest paid over the lifetime of the mortgage increases even further.
Other Options to Consider
Of course, with open minds, it is not impossible to hammer out an agreement that suits both sides. For example, mortgage loans with bad credit can be split between an 80% mortgage and a 20% personal loan, a deal commonly known as a Piggyback Mortgage.
While the personal loan can have a larger interest rate, the payoff for borrowers is that they effectively get 100% loan financing. Also, the mortgage gets a lower rate over its 25 or 30 year term, thus saving a significant amount of money in the long run.
What is more, when a down payment is hard to get together, this kind of mortgage loan agreement is a practical solution to problem.