The most common include 1) not being offered a mortgage renewal from your existing lender; 2) being in default on your current mortgage and receiving a demand to repay in full; 3) consolidating debt by increasing the first mortgage you have on your property.
In the case of a bad credit mortgage refinance, your credit score is likely below 600 and your credit history showing near term defaults and/or late payments.
Once you fall into a distressed credit or bad credit profile, your mortgage refinancing options become limited to sub prime institutional lenders and private mortgage lenders.
From a rate perspective, the options provided by both sub prime lenders and private mortgage lenders can be very comparable.
The most important consideration when you can qualify for both options is what type of interest term are you looking for?
With a private mortgage lender, most interest terms are for a period of one year. You may be able to get more than one year or some type of option to renew, but the most common offering from a private lender is one year.
So if you see yourself being able to repair your credit and get back to a conventional lender within a year, this can be the best option to consider.
With sub prime institutional lenders, they may require you to take a three to five year interest term to qualify for their mortgage financing. The tough part of many of these three to five year terms is that they can be completely closed without any prepayment options, or the prepayment options that are available are extremely expensive.
So if you think there is a good chance that you will not be needing a bad credit mortgage lending solution for more than one or two years, then once again the private mortgage option could very well be the best choice.
On the other had, if you see it taking two or three years to get your credit on track and you don’t have any plans to make any prepayments to your mortgage during that time period, then a sub prime institutional bad credit mortgage refinance may be a better choice, especially if there is a rate advantage from locking in for a longer period of time.
Because private mortgage lending is very short term, the sub prime institutional option should be considered if you are working on a longer time horizon to get your credit back to a conventional lending level.