Mortgages For People With Bad Credit History

While there the credit crunch has resulted in a tightening of the mortgage industry, there are still mortgages for people with bad credit history available if you know where to look.

What is Bad Credit History?

For many individuals or couples who want to own a home, a bad credit history means that they may have a few late pays or have a bankruptcy in their recent past. However, for the purposes of a home loan, the meaning of “bad credit history” can be very specific. In most cases, it includes at least a few of the following.

  • Several late payment notations, either for credit cards or other financial obligations.
  • Bankruptcy
  • Default on previous home or auto loan.
Credit Score

Many people may believe that they have poor credit and never make an effort to even look for a home loan or mortgage because of this belief. However, it is important to understand that many lenders consider a credit score of 640 or higher to be a good credit score. This is why reviewing your credit report prior to applying for a home loan is one important task when considering home ownership.

Prime vs Subprime Mortgages

People with credit scores higher than 640 usually qualify for what are considered prime or good loans. These loans are usually offered at a competitive interest rate, although they may have standard requirements for significant down payments – usually 10 to 20 percent today – and other factors, like a steady job history.

Subprime mortgages, on the other hand, usually have lower requirements for down payments, but may be offered with a cap on the amount loaned. The other factor that often comes into play with subprime loans is that they are usually offered at higher interest rates than prime mortgage home loans.

FHA Loans

One of the home loans available to individuals with poor credit history who need a subprime loan is the FHA loan. These are loans that are guaranteed by the Federal Housing Authority, which is a governmental agency under the Housing and Urban Development Agency. FHA does not actually make loans, but they guarantee them against default. This makes this type of subprime loan extremely attractive to large banks because they know the federal government is taking the risk with the loan, not the lender.

For borrowers, an FHA guaranteed loan is also extremely attractive. Instead of the 10 to 20 percent down payment required for a prime loan, a significantly smaller 3.5 percent down payment is required.

Another factor for borrowers is the limitations that the FHA places on closing costs. While the total allowed cost is set by each local FHA office, generally this amount is limited to approximately one percent of the amount borrowed, and all other expenses must be paid by the seller instead of the borrower.

Finally, credit history requirements are much more relaxed for FHA borrowers. Good candidates for an FHA loan must have at least 2 years of immediately good credit payment history and if they have had a bankruptcy, it must have been discharged at least two years previously.

Summary

While having bad credit can be discouraging for many potential homeowner, it is not impossible to find a mortgage home loan that works around potential credit problems. One of the best options for many borrowers is to investigate FHA loans that are guaranteed by the government.

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