By Karen Lawson
Mortgage Credit Problems Columnist

Having bad credit can be embarrassing and costly, but it doesn't mean that owning a home is out of reach. Creditors, including mortgage lenders, may assess additional financing costs due to their perception of higher risk associated with bad credit loans.  Prospective home buyers and homeowners looking to refinance existing mortgage loans should understand some basics about mortgage loans and financing charges. This can help save money, or avoid unanticipated mortgage terms such as increasing interest rates and rising payments.

Bad Credit: Misunderstandings Can Damage Credit

Credit can be damaged for a variety of reasons, but not understanding the terms of a credit contract can often lead to disaster.  For example, signing for an adjustable rate mortgage (ARM) that has no limits on how payments can adjust can lead to trouble if borrowers don't understand that their payments can increase. When considering bad credit mortgage loans, potential borrowers need to know:

• The interest rate
• If the rate is fixed for the life of the loan or if it changes
• When the rate can change (when the initial low-rate "teaser" period expires)
• What the maximum rate can be at the first adjustment and each subsequent adjustment (rate cap)
• What the maximum payment can be at the first adjustment and each subsequent adjustment (payment cap)
• What the maximum rate and payment can be over the life of the loan (lifetime cap)
• If there is a prepayment penalty and how it is applied
  

If the answers to these questions are not apparent, don't be afraid to ask! Mortgage documents represent a binding contract to repay the mortgage according to its terms. Making payments on a bad credit mortgage can help rebuild credit, but be sure that you don't commit to a mortgage loan and payment that you may be unable to honor. It's important to plan carefully to ensure that any mortgage chosen is affordable and appropriate to individual financial situations.

Your mortgage lender should work with you to find a loan that is most appropriate -- don't be afraid to speak to several until you find one you are comfortable dealing with.

About the Author
Karen Lawson is a freelance writer with extensive experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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