According to the Center for Responsible Lending, over half of those folks who got home loans for people with bad credit in 2006 could have qualified for cheaper mortgages, either FHA or conventional. Some activists contend that this was due to predatory lending practices, that is, lenders steered folks into loans with higher rates to get paid higher commissions. Which shows that many writers and even analysts don't really understand the lending industry.

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That's not how mortgage pricing works.

Any loan has several prices. Par pricing means the loan costs nothing. Then the lender or broker adds a charge for its services -- this can be called an origination, underwriting, processing, loan documentation, administration, or other fee. Sometimes there is a combination of lender charges. But the cost of providing the money at par is zero.

Now, suppose you want a lower interest rate? You can choose discount pricing, and you'll pay discount points (each point is one percent of the loan amount) to get a lower interest rate.

But what if you want lower fees? You can choose rebate pricing. In exchange for accepting a slightly higher interest rate, you get a rebate, which can be used to pay your lender fees. So, as an example, a 30-year fixed rate might be 4.25% at par, costing zero plus a 1% origination charge. It might be 4.0% at a cost of 2 discount points (2%) plus the origination charge, and it might be 4.375% at no points and a 1% rebate to cover the origination fee. That's how mortgage pricing works.

So, if a lender wants to make more money from you it has to change its pricing and charge more for a given interest rate. That's why we always recommend that you shop with several lenders for your mortgage to make sure that you get a good deal.

Commissions are no larger on bad credit mortgages than on prime loans.

The difference is that the rates are higher to compensate the lender for taking on extra risk. If the chances of default are higher because your credit is bad, the only way you will get someone to lend to you is by paying a higher interest rate. So if the mortgage rate offered is 7.25% instead of 4.25%, the commissions are paid the same way. 7.25% might be a par rate, 7% might cost a couple of points, and 7.5% might get you a no-cost loan. But the broker or loan officer makes the same commission.

So, what about the people who could have qualified for prime financing?

Most bad credit mortgage lenders don't offer loans for people with good credit. And most good credit lenders don't do subprime lending. It's a completely different business model. So if you come in looking for a mortgage, they will sell you what they have. If you aren't sure what you qualify for, try FHA or Fannie / Freddie lenders. And fill out the form on this site and see what you are offered. When you cover all the bases, you'll know what kind of rates are on offer for someone with your credit profile and can make your best deal.