Bad Credit Mortgages

This topic is almost silly to discuss considering that bad credit mortgages are partially responsible for the current economic situation…but I digress.  Prior to September 2008, lending institutions were allowed, some say pushed into, making loans to people who the banks knew could not afford the home they are attempting to purchase.  What happens when over 50% of home mortgages are issued by Fannie Mae/Freddie Mac and are given to people attempting to buy above their means?  A major collapse of the home market, or as real estate investors call, the burst of the home market bubble.

Currently, lenders are extremely cautious to lend to anyone with less than a 650 (out of 850) credit score.  However, there are still lenders that will lend to people with no/slow/bad credit; but you will pay for it, and heavily.  Let’s look at some hard numbers.

These numbers are for estimate purposes only:

	Good Credit	Bad Credit
Loan Amount:	$100,000	$100,000
Term:	30 years	30 years
APR:	4.75%	6.50%
TTL Int. Paid:	$142,486.80	$195,001.20

Yep, 1.75% equates to over $50,000 more in interest paid over the life of the loan.  There are several options if you feel you have a bad credit mortgage.  First, if you know you’ve made your payments on time and never missed one or made arrangements, get your Tri-merged credit report with score (you may have to pay for this information.)  Take your credit report to your banker and try to negotiate a lower interest rate, or discuss refinancing options (even if you are only 5 years into your loan.)

 Here’s a great little trick to increase your credit score, it will take some time, but it does work.  Ask your banker about secured loans if the securing collateral is a CD (Certificate of Deposit.)  If they do, then purchase a $1000-$5000 CD and use it to secure a small personal loan.  The next step is crucial, DO NOT SPEND THE MONEY!  Open a separate account with the money and make double payments every month until it’s paid off.  Because you are carrying the loan, there will be interest, make sure you will be able to make any extra payments once the money is exhausted.  When you make your extra payments, stress, “Apply to principle.”  This will decrease your principle, and your interest as well.  Continue this a few times, especially if your bank reports to one or more credit reporting agencies.  If you do this over the course of 1 year, you could have fast credit, even with standing delinquencies.

Consider securing your credit and your good name with LifeLock, doesn’t cost much, but saves you everything you’ve been working on.

Related posts:

1. Should You Refinance Your Home?