The Good, the Bad, and the Ugly Bad Credit Lenders

By Sonja Albrecht
Mortgage Credit Problems Columnist

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Bad credit mortgage options have been growing steadily since the 1990s--today, pretty much anyone can get a loan. The real issue is the terms. Most bad credit mortgage lenders offer reasonable terms to help low-credit borrowers get their foot in the door. But beware: there are some loan sharks out there too. Here's how to tell the difference.

Trust the Fed

The Federal Housing Administration will send up a red flag if a bad credit loan meets the criteria for a "high cost loan." These questionable loans typically add eight points to the Fed's 30-year Treasury yield rate. The Fed mandates extra protections for borrowers, such as requiring lenders to document exactly how much you're borrowing, and how much you're paying in rates and fees. In any case, be wary of a bad credit loan mortgage that falls into this category.

Explore Your Options

Before taking any action, contact at least three lenders and request complete documentation of terms and fees. Review this information carefully. Bad credit borrowers have a wide range of options--there's no reason to jump on the first offer that comes your way.

Avoid Prepayment Restrictions

Leave yourself the option of refinancing your mortgage down the road. This bad credit mortgage is your foot in the door: as soon as you've raised your credit score, you can qualify for a standard, low-rate mortgage refinance.

Assess Your Lender's Character

The best bad-credit lender will focus on your realistic ability to repay your loan. If the lender is pressuring you into borrowing more, encouraging you to overstate your income, or rushing you through the process, head for the door.

These days borrowers with bad credit have an array of reasonable mortgage options--there's no need to settle for high fees and restrictive terms. The bad credit loan you're after is not a burden--it's a stepping stone to good credit and a secure financial future.

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