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Bad Credit Mortgages: The Inside Story Peter G. Miller - Mortgage Lenders Plus.com Add to Delicious, diggit, reddit, technorati favs

There's a lot of information concerning mortgages and most of it is directed toward borrowers with great credit. Alas, not everyone has the strong credit needed for super-fast loan applications or the lowest possible rates.

Good and decent people often wind up with impaired credit for reasons which have nothing to do with spending sprees, big cars or fancy trips. Auto accidents, medical bills, a divorce or job loss can trigger credit problems, collections and even foreclosure and bankruptcy.

For those with troubled finances the solution is often a bad credit mortgage. This is a form of financing that should be regarded as a short-term loan. In other words, you need a loan today with a 30-year term but your goal is to refinance in a year or two with a better mortgage and a lower rate.

Because borrowers with poor credit represent more lender risk, it follows that bad credit mortgages require higher interest rates, more points and larger fees.

How much more? The answer depends on several factors:

• You'll have a lower rate if you put down more cash at closing or if you have more equity when refinancing.

• You'll pay less if you have a higher credit score -- 600 is vastly better than 500.

• You'll pay less if you go with a full documentation loan rather than a "stated-income" mortgage application.

Compare two applicants: Jenkins borrows with 20 percent, 680 credit, no bankruptcies, no foreclosures and uses a full documentation loan application. His interest rate: 6.30 percent plus points.

Westover borrows with a with 20 percent down, has one late payment in the past year, a 500 credit score, uses a stated-income loan application and has a bankruptcy. He pays 10.25 percent plus points for a bad credit mortgage.

With a $300,000 fixed-rate loan over 30-years, Jenkins pays $1,857 a month for principal and interest. Westover? He pays $2,688 a difference of $831 a month or nearly $10,000 more in the first year than Jenkins.

Many people assume that because of a few missed payments or even a bankruptcy they have bad credit but that's not always the case. Here's why:

First, your credit may be better than you think. Say you were late on a credit card bill by a week. You may owe a late fee, but for credit reporting purposes a "late" payment will not show up because only payments at least 30 days old are posted on credit reports.

Second, you may have had a bankruptcy or foreclosure but several years have passed. If you've re-established good credit you may qualify for a regular loan because lenders will see a recent and solid credit pattern. In other words, the old bankruptcy and foreclosure are history.

Third, lenders want to hear from you. If you've got a history of good credit that's been marred by a unique event -- say the loss of a job because a company closed or a medical emergency -- speak with loan underwriters. They have the authority to make "exceptions" to general guidelines, but they need evidence and facts to support their decisions.

Most importantly, there are steps you can take to raise your credit standing and get better rates.

1. Before speaking with lenders, check your credit by going to AnnualCreditReport.com, a site established under federal requirements. While you will not get a credit score you can obtain your credit report without charge. Look for factual errors, items more than seven years old that should not be on the report and bankruptcies more than 10 years old. If you find a problem, contact the credit reporting agency by certified mail with a return receipt requested. Ask that the incorrect or dated item be removed and provide proof if necessary that a debt has been repaid.

2. When you look for financing beware of excessive prepayment penalties. If you finance with a bad credit mortgage you'll want to refinance as soon as you can re-establish good credit, perhaps in as little as a year. However, if a bad credit loan has a hefty pre-payment penalty you may be forced to wait for a new mortgage.

3. As always, the best way to get a good deal is to contact a number of lenders. While one loan officer may see you as a candidate for bad credit financing, another may have programs with better rates and terms.

4. Speak with lenders who offer a large variety of loans. There are huge numbers of mortgage products, and a lender who handles a variety of mortgages can look at your situation and see how you might qualify for a lower-cost loan.

   When it's time to refinance, ask lenders about FHA and VA financing, two loan programs with traditionally liberal standards.

5. As you negotiate the mortgage marketplace, keep your eye on current bills. Re-establishing a strong credit file means making sure all bills are paid on time and in full.

Lastly, consider not borrowing. Bad credit mortgages are not right for everyone. You need to ask if you can afford the high costs of bad credit mortgages or if you would be better served re-establishing credit over time and then seeking a lower-cost home loan at some point in the future. Mortgage lenders can give you the information you need to make a solid decision.