Bad credit can result due to a number of reasons - missed monthly payments, credit card bills, or rent. Though a bad credit will not affect the day to day life, it can prove to be a major obstacle when a loan is applied for - whether for a home, car, or personal loan. The good news is that home loans are now available even for people with a bad credit history.
Home loans for bad credit are also known as Sub prime loans or credit impaired loans. These loans usually carry higher rates of interest than their equivalent prime loans simply due to the fact that the lenders see the borrower as 'high risk'. The rate of interest depends upon a number of factors, including the credit score, size of down payment, and the credit problems that the borrower has faced in the past.
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The first thing the lender does is to check the borrower's credit score. It is a smart idea for the borrower to request for his free credit reports to which he is entitled every year from each of the three major credit bureaus. The report will give him an idea of where he stands.
The next step consists of property appraisal of the current mortgaged home, if any, done by the lender to ensure that the value is enough to safeguard the loan in case the borrower is not able to repay the loan.
The down payment and monthly payments are based on the system of points and interest rates. A point is equal to 1 percent of the total home loan amount. Each lender offers different interest rates and points. A low interest rate with more points translates to a higher initial payment followed by low monthly payments. On the other hand a higher interest rate and fewer points mean a smaller immediate expenditure but higher monthly payments.
Advantages and Disadvantages
Apart from the most obvious advantage of getting the money for a home, sub-prime loans also lets the borrower use the money received to clear off previous debts and improve his credit report. The downside of bad credit loans is that it can lead a person already facing financial problems to further debt.
These loans also come with a pre-payment penalty which the borrower will have to pay in case he wishes to close the loan earlier. So any advantage from refinancing at a lower interest rate or selling the house would be lost.
Home loans for bad credit can be at times more confusing than prime loans. The borrower should make sure that he understands all the terms and conditions of the loan before taking it. It may be a good idea to seek professional services of a broker to help with the paperwork. Also, the borrower must remember to explore all his options and choose the loan which offers the best interest rate and repayment terms.
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