A bad credit mortgage is synonymous with the sub-prime mortgage, that has been in the news since the advent of the downturn in the housing market. This type of mortgage covers people who obviously have less than stellar credit, whether from their own poor management of money or unforeseen circumstances, such as a major illness, leading to a bankruptcy.
Under any circumstances, the people whose credit is not good, like somewhere in the low 700s as rated by the 3 credit rating agencies, such as Equifax, will be penalized when it comes to obtaining a mortgage. The credit rating is expressed as a FICO score, though banks and lenders use more than this as the criteria for determining the creditworthiness of a mortgage seeker.
A bad credit mortgage, in most cases, will entail paying a higher interest rate and having to put down at least 20% of the price of the home. Unfortunately, 95% mortgages are often not available to those with a poor credit history. Banks are presently not in the mood to make risky mortgages, so these people will even have difficulty in obtaining a mortgage at a higher than average rate. In addition PMI (Private Mortgage Insurance) which will be an additional monthly payment, will be required by all those fortunate enough to get a mortgage without putting down 20 %. This insurance paid by the buyer insures the bank for any losses from the buyer not being able to afford the home, leading to foreclosure.
An important fact for the prospective home buyer with bad credit is that the more money put down, the better the chance of obtaining a mortgage. There is a formula the lenders use that can compensate for a low FICO score. The more money put down on the home, the higher the FICO score goes in relation to getting a loan. The FICO score will not rise but the added down payment will add points to the score, solely for the purchase of the home.
{ 0 comments }