Many people believe having bad credit means that buying a home is out of the question. However, there are purchase loans available for consumers with less than perfect credit. Read on for a basic lesson in subprime lending.
The interest rates for non-prime mortgages are higher than for traditional,
or prime, mortgages, but how much higher can vary a great deal from lender to
lender. The rate quoted to a consumer also depends on factors such as credit
score and down payment size. Non-prime loans may also carry a significant
prepayment penalties and/or balloon payments.
A prepayment penalty is charged to the borrower if they decide to sell the
home or refinance before the term of the loan is complete. A balloon payment
means that the borrower has to pay off the loan in full after a certain period
of time. If they are unable to do so, they must refinance the loan or sell the
What if a consumer already owns a home, but is faced with bad credit? In order to help clean up their FICO score, some homeowners may want to cash out on their home equity. Sometimes called bad credit mortgages, these loans are designed to take the equity in one s home and use it to pay off credit card and other types of debt. These loans typically have relatively low mortgage interest rates and the interest is usually tax deductible.
There are definitely options for those with less than stellar credit who are looking to purchase a home or use existing equity to get out of financial trouble. However, because of the variables that exist within the structure of subprime mortgages, borrowers should always compare rates among mortgage brokers and know their credit score before shopping for a mortgage.