How Does a Bad Credit Mortgage Work?
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Definition
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Bad credit mortgages are non-traditional home loans that are provided to people with lower credit scores, since these borrowers may not be able to qualify for a mortgage through a traditional lender. They are considered high-risk borrowers, or sub-prime borrowers, because they may not have enough credit history or they may have had credit problems in the past. They may even have a good record of paying bills on time, but can't save money for substantial down payment on a house they want to buy. Sub-prime mortgage is another term for a bad credit mortgage.
Application Process
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The application process for bad credit mortgages is considerably different from the traditional mortgage application process. It often starts with an online search for a mortgage broker who will shop around for a lender that meets the borrower's need for a bad credit loan. The mortgage broker gets a fee that is usually a percentage of the loan amount as payment for his work, usually from the mortgage company.
A loan officer from the mortgage lender will contact the borrower to help him fill out the application and paperwork. There are many different kinds of bad credit mortgages, with different requirements for each type. The loan officer will collect the necessary verifications from the borrower and begin to process the loan. Depending on the type of mortgage, those verifications may include pay stubs, W-2 forms, bank account statements and investment statements. The lender will also require proof of the value of the property that is being mortgaged. Some loans may not require any verification of income at all. -
Verification and Approval Process
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Once the borrower has filled out the application and handed over all the necessary verifications, the lender will run a credit check with one or more of the national credit agencies. A loan officer will review all the information and decide if the lender qualifies for a loan. The decision will be based on a combination of factors, including the borrower's credit history, the amount of the mortgage, the amount of the monthly payment and the income of the borrower.Based on those things and on the current market interest rate for traditional mortgages, the loan officer will decide on the amount of the loan to be offered and the interest rate to be charged on the loan. In some cases, if the borrower doesn't qualify for the particular loan for which he applied, the lender may offer a loan with different terms.
The Offer Process
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The loan company contacts the borrower with a loan offer. The loan offer will state the amount of money to be lent (the principal), the rate of interest that they will charge and the length of time it will take for the borrower to pay it back. The loan offer will also include any specific conditions attached to the loan, including whether the mortgage rate is fixed or adjustable and when and how much the interest rate may change. The borrower reviews the loan offer and decides whether or not to accept it.
Costs
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The typical costs associated with bad credit mortgages include the following:
Interest is the amount of money that the borrower pays to borrow money. It is expressed as a percentage of the amount borrowed.
Loan origination fees are costs charged by the lender for extending the loan.
Loan broker fees are the fees charged by the loan broker for finding the loan.
Administration costs may be charged by the lender to recover their costs for drawing up the contract and any other costs that they incur in making the loan.
Mortgage insurance may be required by the lender to pay off the mortgage in case the borrower defaults. This cost may be paid in one lump sum at the outset of the mortgage.
Depending on the lender's company, the borrower may have to pay those costs when they close on the loan. Usually, though, lenders add those costs to the total amount borrowed.
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