Credit ratings are a very influential factor when a person has to buy a mortgage. Good credit ratings improve the chances of getting a mortgage; while poor credit ratings may destroy the chances. However, today there are many options for people with bad credit ratings to get their mortgages. In fact, some mortgage companies specialize in selling mortgages to people with bad credit ratings. These mortgage companies are also called sub-prime lenders.
The creditworthiness of a person is rated according to FICO scores. The range of a FICO score lies between 300 and 850. Scores above 720 are considered to be good, while scores below 620 are considered to be bad. These people come under the category called sub-primes.
People may have bad credit due to a number of reasons. It may be due to loss in business, leading to delinquency of payments or even bankruptcy. There may be a medical disability or physical problem due to any other factor. People apprehended in criminal cases also attain bad credit status, as they cannot keep up their payments. However, bad credit no longer deters people from getting their mortgages.
One of the ways is to go for a home equity loan. If the person has been paying some installments on his or her home for a certain period of time, then equity on the home gets built up. This equity can be used as collateral to buy a second mortgage. Home refinancing is another option; a person can exchange his or her first mortgage with a newer mortgage which may possibly have lower interest rates.
Sub-prime loans have the disadvantage of high interest rates. Higher interest rates allow the lenders to acquire more payments from the borrowers and hence reduce their losses in case of default. There may be other stringent restrictions like shorter repayment times and the necessity of a down payment to be paid upfront. In fact, the down payment becomes a blessing in disguise. If the mortgage borrower has saved enough for a down payment, then it reduces the liabilities on the mortgage, which can be paid off faster.
Though it is difficult for people with bad credit to get mortgages, it is not impossible. Bad credit borrowers must shop around for mortgages and scout for lower interest rates and other incentives. Prepayment is generally not allowed on a bad credit mortgage, as lenders do not allow bad credit borrowers to wrangle out of their loans that easily. Hence, a market survey to find out who provides the lowest prepayment penalties would be beneficial.
However, the best option for a person with bad credit is to improve their credit score. This is a long, arduous process, often achievable with patience and a sense of responsibility. Credit scores can be improved by making timely payments, and removing delinquencies by arranging for their payments.