With respect to institutional lenders, many sources of mortgage funding will have minimum credit score requirements which are basically quantitative criteria that you have to meet, but they will also look at the recent credit history to see how payments are being met, which can be more of a qualitative assessment by a mortgage underwriter.
There can be times when there are issues on a personal credit report that are in error which are negatively impacting the credit score and history and basically reflecting a poor credit profile which may be false.
In these situations, its going to be important to not only try to correct the error with the credit reporting agencies, but to have as much supporting documentation available to you as possible to support your position. Then, when we approach targeted lenders with your poor credit profile, we can try to explain the circumstances and/or error so that the mortgage underwriter has something further to base their qualitative assessment on.
Once credit drops below the minimum credit score requirements of the main line mortgage lenders, the sources of funding available to you will narrow down to sub prime institutional lenders such as certain trust companies and private mortgage lenders which can be individual investors, syndicates, and mortgage investment corporations.
The key take away is that its important to have a clear picture of your credit profile before you ever apply for financing so that you are in a position to proactively address, support, and/or defend the issues that show up that are causing your credit to be poor.
As a mortgage broker, my role is to clearly understand your credit situation and then identify the best sources of mortgage financing for your particular circumstances and work with you to get the application submitted, understood, and approved.
If you have poor credit and are in need of mortgage financing, I suggest that you give me a call so I can quickly assess your situation and provide relevant poor credit home mortgage options that can meet your needs.
While this can be the case in many situations, there are also institutional bad credit mortgage lenders, most notably trust companies that have a focus on sub prime or uninsured mortgage lending.
The rates provides by both private lenders and institutional lenders with respect to bad credit mortgages can be very similar in a lot of cases.
The big difference between in the two is in the interest term that is offered.
With a private mortgage, most interest terms are only for a period of one year with some exceptions that can include automatic or paid renewals for additional terms.
The institutional sub prime lenders will tend to offer longer interest terms and the longer the term you commit to, the greater the potential for a better rate.
But with interest term, the borrower decision has to be how long they will require a bad credit mortgage.
If the borrower thinks they can repair their credit in less than two years and return to a conventional mortgage product at a better interest rate, then a private mortgage option is likely going to be the better choice. Part of the reason for this is that the sub prime institutional lenders that provide bad credit mortgages typically do not have any type of prepayment option, and if they do, the cost of prepayment can be quite steep.
So if you’re wanting a little bit better rate and know that you’re going to need bad credit mortgage financing for more than two years with very little if any chance of prepayment of the mortgage, then institutional bad credit mortgage lenders are likely going to be the better option.
Because of these particular choices that are available to those with bad credit, its going to be important to think through with one makes the most sense as it can save you considerable costs down the road if you plan correctly.
The best way to get the property bad credit mortgage in place is to work through a private mortgage broker who can quickly assess you situation and provide relevant bad credit mortgage lender options for your immediate consideration.
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.
The first, and most visible mortgage lenders for bad credit are the sub prime institutional lenders such as certain trust companies. Borrowers with distressed, bruised, or totally destroyed credit is a large part of their market portfolio.
While all bad credit mortgages can be considered equity loans to cover off the higher risk to the lender, individuals can still have great cash flow along with bad credit and therefore can be considered to be good mortgage investment opportunities at the right price.
There are three basic elements in any lending decision with those being 1) equity in the property, 2) cash flow from income earning sources, and 3) credit. When credit has fallen too far for whatever reason, there are still going to be a significant number of situations where the other two factors are still very strong, which is right in the realm of the sub prime institutional lender.
The second category for bad credit mortgages, which is not always as visible, is the private mortgage lender.
Like, the sub prime institutional lender, the private money lenders are also interested in these strong equity and cash flow deals and directly compete against each other for them.
Their offerings can be a bit different as the sub prime lender is looking to lock you into a high interest rate for a three to five year term in more take it or leave types of programs, while the private mortgage lender is more focused on lending funds for a period of one year at a time and can be fairly flexible with respect to repayment if the borrower thinks there may be an opportunity to refinance the mortgage through a lower cost mortgage before the end of the mortgage term, or have some other form of partial or full debt retirement available to them.
There are also a segment of the private lender market that will lend strictly on the equity investment in the property and the strength of the real estate market, regardless of how bad both cash flow and credit may be. This is a smaller section of the private lending market with rates being higher to reflect the level of risk the lender is going to be faced with.
For many individuals with bad credit, both sub prime mortgage options and private mortgage options can be relevant to their situation.
Each has its pluses and minuses to consider.
The best way to not only locate the most relevant bad credit mortgage options, but to also get help making the right selection, is to work with a private mortgage broker.
If you have bad credit and want to better understand your mortgage options, I suggest that you give me a call and we’ll go over your situation and discuss the different bad credit mortgage alternatives available to you.
And when I say equity, I mean the difference between the market value of the property and any mortgages or property liens currently in place.
Most private mortgage lenders will not provide a mortgage that in combination with any existing property charges would exceed 85% of the fair value of the property.
And the more equity you have in a property, the more bad credit mortgage financing options you will have available to you.
This is because at lower loan to value levels there is less risk of loss to both institutional and private mortgage lenders. Therefore, more lenders will be interested in the mortgage financing opportunity which means more competition and potentially better rates and terms.
Conversely, as the loan to value ration increases, the interest rate on a mortgage with bad credit is going to go up with less potential lenders interested in the deal.
It will also be easier to secure either a first or second mortgage on a smaller amount of funds compared to a larger amount when you are holding a bad credit profile.
Most private mortgage lenders will not consider funding requests over $500,000, making it more difficult to secure larger amounts.
Another element of getting a mortgage with bad credit is whether you have any secondary security you can provide to the lender. Some bad credit mortgage lenders will consider other forms of security such as investments, vehicles, currency, works of art, and so on. These additional items can further reduce the lender’s risk of loss if the loan to value request is at or near the maximum the lender will consider.
When we speak of bad credit, there are also varying levels of credit. If someone has a low credit score, but has one or more years of never being late with a payment, there are going to be more lenders interested in that particular deal compared to someone who not only has a low credit score, but also has a near term credit history showing late payments and/or defaults.
Both institutional and private mortgage lenders can provide a mortgage with bad credit. And in some situations, their offerings can be very similar.
To better understand how to locate and secure a mortgage with bad credit, I recommend that you give me a call so that I can quickly go over you situation and provide bad credit mortgage options for your immediate consideration.
Now in 2011, the institutional portion of the sub prime market is back in full force with more supply expansion coming into the market.
For the sake of a definition, we refer to sub prime mortgage lending as anything where a borrower cannot qualify for the main stream bank or institutional mortgage programs including insured mortgages for high leverage mortgage requirements.
Sub prime mortgage offerings most typically fit individuals with some form of distressed credit. Another term for this type of loan is a bad credit mortgage.
From the institutional side of things, credit unions and trust companies lead the way in providing sub prime residential mortgages.
Their main competition is from private mortgage lenders and for good reason.
In many cases, a sub prime mortgage offering from a trust company, for instance, can have a rate that’s similar to a private mortgage offering. When this is the case, then private mortgages should be considered before signing up for an institutional sub prime mortgage for a number of reasons.
First, an institutional sub prime lender typically requires the applicant to enter into a three or five year fixed interest term to get the best offerings. These will be amortized mortgages, so with a higher interest rate the payments are going to be considerable on a monthly basis.
Private mortgages are mostly interest only, so the payment burden to service the debt on a monthly basis can be considerably less.
Second, because institutional lenders are providing fixed interest terms, the prepayment penalties can be substantial if you have an opportunity to pay down the loan above and beyond the regular principal payments, or have the opportunity to refinance the mortgage at a lower rate during the interest term.
A private mortgage for one or two years can have a small interest only prepayment penalty or be completely open after a certain number of months have passed.
If you’re using a sub prime mortgage to finance a property while you’re getting your credit in order, then a private mortgage may be a better way to go due to the potential prepayment flexibility.
Third, a private mortgage can, on average, be put into place much faster than an institutional mortgage of any sort. So if you’re in a hurry to get a subprime mortgage in place, a private money loan through a private lender can end up being the fastest option.
If you’re in need of a sub prime mortgage for a residential property or would like to know more about your options, I suggest that you give me a call so we can discuss your requirements and review both the institutional and private mortgage possibilities.
These equity based mortgages, even though issued at higher interest rates that a bank or institutional lender are still considerably cheaper than alternatives such as payday loans, credit cards, asset based lending against non real estate items, etc.
Even for people that don’t have bad credit, you are more likely than not to carry an interest rate card that will charge you an interest rate in the mid to high teens if you don’t pay off your balance every single month.
When someone truly has bad credit, the options for securing a bad credit loan are truly limiting, and options that are available may come with unmanageable interest rates and high monthly or weekly cash flow requirements which make them very short term solutions due to their cost and strain on the cash flow.
By contrast, a bad debt loan through a private mortgage lender is going to be most interested in the market value and marketability of a property you have equity in that can be used to secure a private mortgage.
The key to being able to secure a private money loan is to have equity available in a property you own or in a property that someone else is prepared to put up for security.
As long as the loan to value ratio after a new mortgage is secured is no greater than 60%, there is a pretty good chance that there is a private mortgage solution available to you. That being said, private lenders can potentially go as high as 90% on second mortgages, but this is not typical, and the nature of your credit profile will likely impact the loan to value the lender will be comfortable with.
There are also can be a lot of misconceptions as to the cost of private money. Also referred to as hard money, private lending can start in the high single digits for interest rates and range up into the mid teens. Pricing is related to risk, so the stronger the property you hold and the more equity you have in it, the better the rate you are likely going to be able to secure.
From a cash flow basis, most private lenders will only require interest payments each monthly on a bad credit mortgage. So compared to a conventional mortgage from a bank where principal and interest payments are both required on a monthly basis, the actual impact on cash flow of a private mortgage is negligible compared to cheaper forms of financing.
In order to locate and secure a bad debt loan that meets your requirements within the time you have to work with, you best approach would be to work with a private mortgage broker that has direct access to private lenders that financing similar deals in your area.