Having bad credit does not necessarily mean you do not pay your debts. There are many reasons that lead to developing bad credit, like illness and a previous job loss. Many people assume that it means you cannot get approved for a home loan because that is the way that things have been for a long time. Due to economic instability, however, lenders are now making it possible to get a low credit score mortgage. The key to obtaining a good deal on your loan is knowledge.

There are many different kinds of home loans and programs available. With bad credit, your options are generally limited, but not completely horrible. If you qualify for a mortgage, you are on your way to owning a home and building a positive credit history.

Loan Type #1:

An FHA loan is one of the common low credit score mortgage available. It is guaranteed by the government though the Federal Housing Administration. These loans are so popular because even though the qualifying criteria is not the same as other kinds of mortgages, the loan terms do not differ much.

Understanding FHA Mortgages

Most people who have heard about FHA loans believe that the financing is provided by the government. In fact, this is not true. These loans are only guaranteed by the government. The financing for a home loan still comes from private lenders. It is like insurance – the government insures the loan so lenders can extend credit to high risk borrowers.

Qualifying for an FHA Loan

A typical mortgage loan is generally based on several factors, using your FICO credit score as the core and major factor. An FHA loan does not rely on your credit score. This type of low credit score mortgage gas other factors that will determine if you qualify.

Your credit history, as a whole, is the main factor here. The FHA looks at your whole history, but is more interested in the last year. If you have made payments on time during that year you are considered acceptable. It is not just limited to newer accounts either. If you are making payments on old, previously delinquent accounts this counts, and help even more. The volume of credit inquiries, and what type of business inquired, are considered. Some types of new inquiries are overlooked, like those that are mortgage related.

The FHA also looks at your housing history for at least a year. If you can show that you have made your rental payments on time, you will meet these qualifications for a low credit score mortgage. You can provide canceled checks or rent receipts along with a copy of your lease agreements or statement from the landlord.

Benefits and Drawbacks

Because there are different qualifying criteria, an FHA loan is particularly beneficial. The FHA does not consider delinquent collections if you have an acceptable reason why you did not pay. Down payments are smaller than other bad credit loans and if a family member gives you the amount for the down payment it does not count against you.

This type of low credit score mortgage can have its drawbacks. You will have a limited amount that you can borrow depending on your area and the housing market. You will need to have mortgage insurance with at least 1.5% up front.

Loan Type #2::

An 80/20 mortgage loan is another option for people with low credit scores. Quite simply it is a combination loan. It is designed for people who do not have a down payment. It combines 80% of the loan with 20% that would have been a down payment.

Understanding an 80/20 Loan

With this type of low credit score mortgage, two loans and two lenders are involved. The first loan is 80% of the total cost of the home. The remaining 20% is a separate loan through another lender as the down payment.

Qualifying for an 80/20 Loan

Qualification criteria for this type of mortgage loan is going to be similar to other loans. Your FICO score and credit history are big influences. Unless you use a mortgage broker, you will need to have two copies of every document so each lender has a copy.

Benefits and Drawbacks

The biggest benefit of an 80/20 low credit score mortgage is that you do not need to come up with a down payment. Another benefit is that you are not required to get private mortgage insurance, which saves you as much as $60 a month. The interest and payment amount is going to be much lower because the loan is split. Because there are two different loans with two different terms and one is larger than the other, you are going to pay off one loan before the other. When the smaller loan is paid, you will save the money that is spent each month on that loan.

An 80/20 loan has a few disadvantages. Since there are two loans, there are two mortgages, which means there are usually two different terms. One mortgage could have a fixed rate, while the second could have a balloon or adjustable rate. Additionally, you will need to maintain two separate payments and pay all the closing costs associated with both loans.

Improve Your Chances

Although there are options available for home loans, there are some things you can do to improve the chances that you will get approved. Start with your credit. In many cases, there are mistakes or inconsistencies in account reporting. Usually there are accounts on your credit that you have paid and closed that are still reporting as open but do not show payments. Lenders can mistake these for delinquent accounts and they also affect your FICO score.

You can also increase your chances with getting a low credit score mortgage if you can save between 5% and 10% for a down payment. This can also help you secure a lower interest rate and smaller mortgage payment. If you are not able to save money, get a co-signer good credit, like a family member. Having a credible co-signer shows the bank that there is someone that will be responsible for the loan if you should default.

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Recent trends in the housing industry, as well as the global economy in general, have made getting credit more difficult. Due to risky sub-prime mortgage loans given to people who could hardly afford to make the payments, the housing industry has suffered a huge downturn in recent years. Banks have reevaluated their lending practices and requirements, and all of this has made it far more difficult for the average consumer t get credit of any type, but especially home mortgage loans.

Statistics show that more than one third of Americans have bad credit, which is defined by a RICO credit score of less than 600. For these borrowers, finding a home loan is far more difficult, costly and time consuming. Consumers seeking a high risk mortgage loan must be informed and prepared before applying. These borrowers must avoid predatory lenders who seek to take advantage of their difficult situation.

What is a High Risk Mortgage Loan?

When a borrower meets certain criteria, they are considered a higher risk for not following through on the payment and terms of their home loan. The criteria include lower credit scores, a patchy work history, a lower income or a history of bankruptcy. These borrowers will find it impossible to find a conventional home loan in today’s lending environment, and must instead search for options with high risk mortgage lenders. . High risk mortgages are harder to find and more difficult to get, and charge much higher interest rates than conventional loans to compensate for the higher risk they are accepting.

In order to validate the risk of loaning money to these high liability borrowers, high risk mortgage companies will charge higher interest rates for home loans. Lenders who consider offering high risk mortgages will use many criteria to determine the rates of these home loans. This is known in the industry as risk based pricing.

These lenders consider many aspects to determine the terms and rates of a high risk mortgage; this process is called risk-based pricing. The most widely used determination of risk-based pricing is the borrower’s RICO credit score. This score establishes how high the interest rate of the loan will be set. As well as the RICO score, lenders will consider the types of payments reported on the credit report, the debt to income ratio of the borrower, and other financial circumstances.

These high risk loans differ from more conventional loans in a few aspects. These home loans are more likely to have a balloon payment penalty, pre-payment penalty, or penalties for both. A pre-payment penalty is a charge or fee that the borrower must pay when paying the loan off before the end of the original term. Borrowers normally pay a loan off early when they sell the home or refinance their mortgage to get a better interest rate. A loan that includes a balloon payment means that the borrower will have to pay off the entire remaining balance in one lump sum after specified period of time as elapsed. The normal balloon payment period is five years. If the borrower is unable to pay off the entire balloon payment, or balance of the loan, the must refinance, sell their home, or lose it to the bank.

How Credit Scores Affect Mortgage Rates

The biggest factor that lenders use to determine a mortgage’s interest rate is the borrower’s overall credit score, known as a RICO score. Credit scores range from 350 to 950. The higher the credit score, the easier it is to obtain a mortgage loan. The lower the credit score, the more risk the lender assumes they will be taking when loaning money, and the higher the interest rates will be to compensate for this risk. Carefully checking the credit report for errors and correcting any inaccurate accounts can often raise the credit score of a borrower, so this is an important first step in the mortgage process.


Taking the time needed to improve the credit rating can save a borrower thousands of dollars in interest rates over time, and make monthly payments much more affordable. The simple act of paying bills on time, paying off delinquent accounts and improving the dept to income ratio can easily raise a credit score and put the borrower in a better position when approaching mortgage lenders.

A borrower can also lower their credit rating to improve their chances of obtaining a lower interest loan by reducing their debt to income ratio. This standard ratio is determined by creating a ratio of total monthly debt (minus household utilities) divided by the total gross monthly income. A ratio of 35% is far too high to justify the risk of a mortgage loan. A more acceptable score would be around 26%. The debt to income ratio can be lowered by paying and closing low limit credit cards before applying for mortgage loans.

Finding High Risk Lenders

Consumers can take several steps to ensure they are finding the best rate and most trustworthy mortgage lender. However, applying to several mortgage lenders who each check a borrower’s credit history can itself have a negative effect on a credit rating  Before applying, borrowers should choose a few lenders with which to apply, and be prepared before meeting with them..

When looking for a high-risk lender, borrowers should research and check into the history and business practices of the lenders they will be applying with. A home mortgage loan will likely be the largest and most important financial commitment ever made. A borrower who is looking for a high risk lender often settles for the first lender to offer them a deal, without considering whether that deal is the best one for their situation. Any mortgage borrower should be very specific about the lender they choose to finance their home loan, regardless of their credit rating.

A reputable mortgage lender will offer the best rates and terms for the situation of the borrower. To be certain they are receiving the best deal available, borrowers must compare rates and terms with other lenders. This can usually be done online, and is an important step in considering the merits of an offer from a lender. Even borrowers with low credit are entitled to fair and accurate mortgage practices.

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