People with low credit scores, or what others call as those with bad credit, can still borrow from traditional mortgage financing companies or lenders contrary to what most think. There are still home loans available for people with bad credit. The downside to it is that those bad credit home loans usually come with high interest rates, which means that the borrower has to pay an extra hundred dollars more in monthly interest payments, depending on the amount of the mortgage loan.
Most, if not all, mortgage lenders or financing companies base their credit evaluation of a potential borrower on the borrower’s three-digit credit score. This is how they traditionally determine who to lend money to. They also base the interest rates of those home loans on the borrower’s credit score. The high interest rate on the home loans of those with bad credit is to account for and to mitigate the financial risks of lending to high-risk borrowers.
What credit scores or credit ranges, then, are considered high risk?
Credit scores range from 300 to 800, with 800s as the best credit score. Those with credit scores of 750 or higher can get home loans with the lowest interest rates from mortgage lenders and financing companies. It will vary from one lender to another, however. Potential borrowers who have credit scores of 620 or lower will have a difficult time getting a home loan from traditional financing companies and lenders are considered as high-risk borrowers.
What are the factors that can shave significant points off a credit score?
Those who have filed for bankruptcy will get a huge hit on their credit scores. Those who have had their house foreclosed at one point will also get low credit scores. But, even if one have not filed for bankruptcy or have not had his or her house get foreclosed, one can still have a lower credit score if he or she has a history of missing several bills payments or has a history of paying his or her bills late. One with high level of credit card debt will also get a hit on their credit score.
A potential borrower with bad credit can approach a sub-prime lender or financing company in order to increase his or her chances of getting his or her loan application approved. Sub-prime lenders, however, charge higher origination fees and interest rates.
A potential borrower will also have increased chances of getting relatively good terms from a sub-prime lender or financing company if he or she will approach a sub-prime mortgage broker. The sub-prime broker will get at least four sub-prime lenders to send proposals to potential borrowers. In this way, the potential borrower can compare and find a sub-prime lender who can provide credit terms that will relatively fit his or her needs.
A potential borrower with bad credit or low credit score can attempt to shop around by himself for sub-prime lenders which will provide a relatively good interest rate and credit terms but it would be tedious and time consuming. If one has that kind of time and patience, then, it would be a better alternative rather than going to a sub-prime mortgage broker for help.