A bad credit mortgage is largely placed through private mortgage lenders due to their lower reliance on credit rating and credit history, which is also a function of the interest rate for private mortgages being higher.
When we are speaking of bad credit, we are basically referring to a level of credit that is not going to be acceptable with any institutional lender. While there are no hard and fast rules to say at what point someone can be considered to have bad enough credit that a bank or institutional lender would not approve their application, any beacon score in the low 600’s or lower is going to be a prime candidate.
And there are varying degrees of bad credit that will further disqualify applicants with some private lenders as well.
For instance, if someone has a 600 credit score and is habitually behind on their payments with defaults where loan amounts have been written off, there are going to be lots of private lending sources that will not be interested in providing a mortgage to this type of credit profile as it speaks to collection problems and a high potential of foreclosure.
For bad credit mortgage applicants that fall more into this extreme category, there may still be private lenders that will fund the financing request, but the rates and fees are likely going to be higher, the loan to value available lower, and a no tolerance approach to any missed payments, late payments, or other breaches of the terms and conditions of the mortgage.
The two most common reasons that a bad credit mortgage is required at debt consolidation and mortgage refinancing, or some combination of the two.
For whatever reason, the borrower has gotten behind on either their unsecured debts, or their mortgage, or both, and new funds are required to pay out existing creditors that could be demanding payment, and in the case of a mortgage lender, moving towards foreclosure.
The bad credit mortgage is essentially a home equity loan that is being granted based on the equity in the property and the lender’s view of the marketability of the property in the event of default.
The most common form of bad credit mortgage is a second mortgage behind an institutional first mortgage where the second mortgage is used to provide additional funds to consolidate debts or bring other debts up to date, including the first mortgage.
Under this scenario, the borrower may not want to refinance the first mortgage either because prepayment penalties may be triggered, or because their credit has deteriorated to the point where they may not be able to qualify for a new institutional first mortgage, even though the existing one may be up to date.
Most bad credit mortgages from private lending sources are going to be for one year with some having the right to renew for an additional year provided all the payments have been made on time and a renewal fee is paid.
These types of mortgage terms make most bad credit mortgages very short term in nature and essentially a bridge loan to buy time for either the borrower to repair their credit so they can qualify for a bank or institutional mortgage at a cheaper rate, or market the property for resale with enough time to maximize the potential return.
Private mortgages typically have lender fees due on closing with interest rates being higher on second mortgages compared to first mortgages.
While the larger private lending corporations do market their funds themselves to the general public, most private lenders work through individual mortgage brokers or the mortgage broker network.
Therefore, to achieve the greatest potential access to bad credit mortgage financing, one would be well advised to work through an experienced mortgage broker that has direct access to private lenders that will consider a particular financing request where bad credit is involved.
Selecting the right broker is also going to be important as most mortgage brokers do not have direct access to private lenders, but gain access through one or two degrees of separation through other brokers. If you’re in any time of time crunch, you want to make sure you are working with someone who can find a solution for you right away versus working with a broker that has to go through a series of other brokers that add both time and cost to the process.
Depending on the application, a bad credit mortgage can potentially be applied for an funded within two to five business days, making is a ready source of capital as well.
If you are in need of a bad credit mortgage or would like to learn more about how they may apply to your situation, I recommend that you give me a call so I can quickly assess your requirements and provide relevant bad credit mortgage options for you immediate consideration.