The Disadvantages Of No Credit History Mortgage

If you find the increasingly uncommon no credit history mortgage home loans, be cautious about the loan terms and consider the disadvantages of this type of loan before signing on the dotted line and committing yourself.

Interest Rates

One of the largest disadvantages of a no credit history mortgage is the interest rates that are often charged for these types of home loans. Lenders are taking on the burden of risk when they either do not check credit history or lend money to a borrower who has little or no credit history at all. In many cases, lenders charge several points higher for a no credit history home loan than they would for a loan that was being offered to someone with moderate to good credit history. Borrowers can expect to pay a minimum of at least three to five interest points higher than the average home loan interest rate for better loans.

Another difficult aspect of interest rates with this type of home loan is that very often they are adjustable rate mortgages or ARM loans. Adjustable rate mortgages have interest rates that regularly reset according to the going interest rate in the financial markets. In periods of lowered interest rates, this can be an advantage. However, when interest rates are on the rise, then interest rates on an ARM loan regularly increase. Although legally most loans have an annual cap on how high the interest rate can increase over a 12 month period, this does not totally eliminate potential problems since an ARM may reset as many as four to six times over a 12 month period, depending on the terms of the ARM.

Monthly Payments

As a result of high interest rates, usually a no credit history home loan has very high monthly payments. For individuals already in difficult financial straits, high monthly payments can actually make a bad problem even worse. Consider that most often those who need to take out a no credit history home loan are those who have poor or very bad credit histories. If this is the case, then a high monthly payment will only make a bad situation worse.

Also consider that if the mortgage is an adjustable rate mortgage, then the monthly payment will often increase substantially every time the mortgage rate resets, increasing the monthly payment even more.

Down Payments

Finally, one of the other biggest disadvantages to no credit history mortgages is that very often lenders require very high down payments as a good faith payment from the borrower. Consider that in today’s market, the average down payment is anywhere from 10 to 20 percent of the purchase price of the home, depending on the lender and the home loan. Very often, no credit history home loan lenders require anywhere from 25 to 40 percent down payments in order to mitigate lender liability as much as possible. If the borrower defaults on the loan, the lender has the down payment in automatic home equity should they need to foreclose on the home and take over ownership.

Summary

No credit history mortgages are becoming more difficult to obtain and are home loans with definite disadvantages when compared to other home loans. Given the high interest rates charged, high monthly payments and high down payments required, even if you have poor credit, it might be better to consider a more traditional home loan when purchasing a home.


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