What's the Truth about Bad Credit Mortgage Lending?
Here's a taste of what elected officials and the media are saying in the wake of the mortgage crisis, which first became apparent when sub-prime loans began to go bad: "Sub-prime or bad credit mortgages are evil!" "Borrowers were unable to understand (read: too stupid to figure out) what they were signing." "Home buyers were given attractive rates and then after 2 or 3 years the horrible lenders pulled the rug out from under them." "This must be stopped!"
Consider the Purpose of a Bad Credit Mortgage
Okay, so what are our leaders really saying? That it was BAD for lenders to give a decent starting interest rate to borrowers with credit blemishes? Think about it. Borrowers had two to three YEARS to clean up their credit and refinance before their rates increased. And if they didn't do it with that much time (you can get an FHA loan 2 years after a bankruptcy or 3 years after a foreclosure if you can show that you've cleaned up your act) then it seems a bit unfair to blame the lender who did after all give these buyers a chance. Subprime loans aren't meant to be a way of life; they are supposed to be a way to rebuild credit and get a home while doing it. By taking these loans away, our legislators make it harder for those who are motivated to turn their credit history around and make a housing investment to do so. And most of the people with those loans did successfully pay them -- why hurt those who are after all in the majority?
It's also unfair to the rest of sub-prime, bad credit, or Alt-A borrowers to say that the government has to protect them from themselves. Kind of insulting, like if you had a financial setback it must mean that you're stupid, greedy, or lazy. But now the government wants to add even more pages to your loan packages. Not a problem except that it increases paperwork and expense in an already burdensome process.
Make a Sub-prime or Bad Credit Mortgage Work for You
You probably don't need your hand held while getting a sub-prime mortgage. However, by following these guidelines you may be able to take advantage of a great real estate investment while prices are lower:
1. Work with a federally regulated lender. One big problem associated with bad credit mortgages is that about half of the lenders aren't subject to federal regulation or scrutiny. A reputable lender is your first defense against being ripped off.
2. Shop for your mortgage and read your documents thoroughly. Make sure that if you have a prepayment penalty it isn't longer than the fixed rate period of your loan -- you don't want to be stuck with a high rate when your loan begins adjusting. By checking with several lenders you can be more certain of getting a fair deal because subprime loans are underwritten and priced differently from traditional mortgages. It pays to have a number of lenders look at your application and see what they can come up with.
3. Use your time wisely. If you have two years to clean up your credit before a rate increase make sure you start immediately. Pay your bills on time, close any open collections, and take care of judgments or tax liens. If you don't have the discipline and the means to get this done then home ownership is probably not a good idea for you yet.
4. Try FHA first. If you are borderline-bad you might be able to squeak into an FHA program. Even if you can't, get the guidelines for approval so you know what you will have to do to be approved when you are able to refinance out of your bad credit home loan.
5. Ask for advice. That's what this blog is for -- we're here to help you with your bad credit mortgage questions.
