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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