The difficulty for most of us seeking a home loan with bad credit is in finding a mortgage provider willing to take the risk on. The terms and conditions of taking on such a major debt to buy a home can be crippling, so there is no doubt that the challenge is acute.
However, there is light at the end of the tunnel, with an increasing number of options available to bad credit borrowers looking to purchase a home for the first time. Those that benefit most are tenants, who often have insufficient assets, as well as a poor credit history, working against them, making the chances of securing mortgage approval smaller.
But when hoping to secure a home loan, what are the likely terms to expect when bad credit is a part of the equation?
Why Bad Credit Does Not Matter
It would seem that a poor credit history would be enough to ruin the chances of being approved. But the property market is not able to sustain itself by excluding such a large category of borrower. For this reason, applicants seeking home loans with bad credit can see their applications approved, though with strict conditions satisfied first.
But keeping the market is not the only reason why securing mortgage approval with less than perfect credit ratings is possible. The fact is low credit scores are no indication of risk of default, especially since many bad credit borrowers today are such only because of financial bad luck - not financial irresponsibility.
In any case, the terms of any home loan are such that only those who can prove affordability, not boast a good credit history, can be trusted to meet repayments without a hitch. So, elements like their debt-to-income ratio is much more significant.
Terms To Expect
So what are the terms typically on offer to applicants seeking home loans with bad credit? And how do they compare to normal terms? Well, there is no avoiding the fact that any loan with bad credit usually comes with higher rates of interest. The idea is to compensate the lender for the perceived extra risk.
However, another important aspect to a specially structured mortgage for bad credit borrowers is the repayment term. A term of 25 or 30 years is normal when securing mortgage approval but mortgage providers are willing to extend the term to 35 or 40 years to make the repayments affordable.
Another home loan aspect to expect is a structured mix of fixed and variable interest rates. A fixed rate is charged during the first 3 to 5 years, to help in managing the immediate impact. Once a habit is developed, then a variable rate is charged.
Opting For An FHA Loan
Most of the time, applying for a home loan with bad credit is likely to end with terms that are competitive but still a challenge to meet. However, securing a mortgage through the Federal Housing Administration (FHA) can result in much more effective savings. An FHA mortgage is still granted through regular mortgage providers, but because mortgage insurance is paid by the borrower, the terms are much better.
Also, while securing mortgage approval is normally dependent on providing a 10% down payment, an FHA mortgage expects only a 3.5% down payment. This saving is added to by the fact the seller is permitted to pay closing costs on behalf of the borrower as an incentive.
Still, even with such impressive savings to make via the FHA, it is important to shop around for the best home loan terms. The mortgage issuer, remember, is independent so they will have their own lending policies. However, they must be FHA approved.