How to Obtain a Mortgage Loan with Bad Credit

Updated on 3/18/2013

By Daniel Duffield

The “American Dream” is still alive for many people, but with a huge downfall in the economy, bad credit has become a normal issue for people looking to purchase a home or refinance their mortgage. If you are worried that bad credit will prevent you from being approved for the loan, a bad credit mortgage loan can be the solution. Although the sub-prime mortgage loans that were a popular solution to those who had a low FICO score before the housing crash, there are now many restrictions on providing financing for bad credit mortgages, though there are still some mortgage lenders and government backed programs out there that can help a borrower attain a bad credit mortgage loan.

Whether you are a first time home buyer with bad credit or looking to refinance your current bad credit mortgage to a better rate, Lender411.com provides a wide variety of lenders who offer multiple loan programs and may be able to help you with the bad credit home purchase or bad credit mortgage refinance that you need.

What is a Bad Credit Mortgage?

A bad credit mortgage is exactly what it sounds like: a mortgage given to a borrower with bad credit. With these mortgages, borrowers have the opportunity to receive a loan while simultaneously repairing their credit scores.

What are the Advantages of a Bad Credit Mortgage?

For borrowers who have undergone a short sale, foreclosure, or bankruptcy, bad credit mortgages may be the only option. Although borrowers with damaged credit may qualify for other types of loans such as a hard-money loan, bad credit mortgages provide access to a loan with reasonable terms, depending on the lender.

In addition, these loans contain stringent terms to protect lenders from taking losses. As a result, bad credit mortgages can help borrowers develop better habits for maintaining a decent credit score. While making payments on a bad credit mortgage, a borrower can repair his or her credit and eventually qualify for a refinance with a lower interest rate. Thus, a bad credit mortgage gives desperate borrowers a chance to acquire the necessary funds from a loan while working to repair bruised credit.

What are the Disadvantages of Bad Credit Mortgages?

As previously indicated, bad credit mortgages have much more rigid terms than traditional loans in order to add security for lenders. To compensate for the risk, interest rates for low credit borrowers will also be much higher, making these mortgages more costly in the long run. Consequently, missing a payment or making a late payment can have costly repercussions.

What is the Cost of a Bad Credit Home Mortgage?

The cost of a bad credit home mortgage varies from borrower to borrower. Successful management of a bad credit mortgage can be fairly inexpensive, while falling into the same credit-damaging habits could cost a fortune. Due to the rigid guidelines of most bad credit loans, any failure to uphold the terms and conditions of the loan may result in exorbitant penalties and fees.
In terms of mortgage payments, lower credit scores will translate into higher interest rates and higher monthly payments. Always compare mortgage rates to find the lowest possible price, especially for loans taken out with bad credit.

How do I choose a Bad Credit Mortgage?

There are several points of comparison between bad credit mortgages:

Interest Rate. Always search for the lowest interest rates possible. Although you will not have access to the best rates due to credit requirements, you can save thousands of dollars in the long run in minute percentage differences in interest rates.
Terms and Conditions. Although terms and conditions of a loan will be generally restrictive to borrowers with poor credit, search for a loan with the most favorable, especially those without prepayment penalties.
Minimum Term. If you are looking for a short-term loan rather than refinancing, find a loan with a term as short as possible to speed up the conversion process.
Lender Credibility. Make sure your lender is properly qualified before making any financial commitments.
Future Mobility. Whatever your plan for the future, make sure that the loan provides the means to achieve a goal. In other words, if you plan on raising your credit and refinancing within a certain amount of time, make sure that your loan includes provisions which make this goal a possibility.

Choosing a Trusted Mortgage Lender Specializing in Bad Credit

The most important aspect of finding a bad credit home mortgage lender is to take the time to explore your options. Consult with each lender to determine which one can offer you the most favorable terms. The terms are likely to be similar, but you may find several lenders who can offer terms that are more favorable than the terms of others when looking at bad credit home loans.

Stay away from lenders who claim they can offer their clients the same terms as those with good credit. Although you may be tempted to believe this claim, it’s very likely that that particular lender is less than reputable. Maintain caution when searching for a bad credit mortgage lender because there may be people looking to take advantage of your situation.

Bad Credit Mortgage Refinance

There are a number of reasons to consider refinancing your home but you may hesitate to do so if you have bad credit. In fact, a whole new idea has taken over: loan modification. Many lenders no longer offer bad credit home mortgage refinance options to homeowners who have poor credit scores. Instead, they are relying on loan modifications since many distressed borrowers don’t qualify for a refinance. Loan modifications also relieve the pressure of meeting the following refinance standards: good credit, equity, employment and income.

Since you’re already working with your current lender, a low FICO score isn’t a problem because credit isn’t analyzed in this process. Equity is also not an issue for a loan modification because if you’re upside down, so is your lender – they won’t have an equity requirement.

Employment is more relaxed for loan modifications – you just have to prove that you’re currently working. However, if you’re applying for a bad credit mortgage refinance, you need to prove that you’ve worked a minimum of two years at the same job. Income, though a big factor in loan modification, isn’t regarded the same way as in the refinance process. All you have to do for a loan modification is prove that you can make mortgage payments at a certain payment each month.

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Due to a fraudulent loan, I had to file for bankruptcy. I had great credit prior to the bankruptcy, which unfortunately just happened. I am working with my attorney to work on a loan modification but I am thinking I might just want to walk away and start over. I would like to see if I could get a mortgage - I have a 640 credit score (even with the bankruptcy) and want to know if there is something that I can do

My house is paid for and I want to know if I can get a loan against it with bad credit?

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