For those with bad credit, getting a home loan seems as
likely as flying to the moon. It’s just not going to happen. Yet there are
lenders who do offer loan programs for those with damaged credit. There was a
time however that such loan programs essentially vanished from the lending
landscape just about 10 years ago when toxic loan programs began to falter.
Today however, lenders have opened up home financing to those with bad credit
in many instances. How do lenders approve bad credit and why do they do it in
the first place?
The so-called “subprime” market refers to the mortgage
marketplace where the loan programs cater to those with damaged credit. There
are some variances on lending guidelines but in essence they all share the same
basic characteristics. Applicants must be able to verify stable employment and
income. They should be employed for at least two full years and be able to
provide copies of their most recent pay check stubs and W2 forms.
These loans will also ask for a sizable down payment from
the borrowers. You won’t find any 3.0% down bad credit home loans but you can
find such loans with a down payment of at least 20%, more with some programs.
Funds for down payments and closing costs must be verified by providing copies
of recent bank statements showing sufficient funds to close.
Interest rates for such loans will of course be higher than
those for traditional mortgages and can vary based upon the down payment,
credit score and the loan program. Bad credit loans are also shorter term in
nature and typically in the form of a hybrid mortgage. A hybrid is an
adjustable rate loan that is fixed for an initial period, say three to five
years. The strategy is to obtain financing while making the mortgage payments
on time, gradually improving credit scores to the point where the loan can be
refinanced into a conventional loan.
Lenders offer these loan programs to those who need it
because a) there’s a market for them and b) it helps the real estate market in
general. When there is a larger pool of buyers that allows homes to sell more
quickly, increasing demand. Not all lenders participate in this market but
those who do really are doing a service to not only the real estate industry
but to the bad credit home buyers themselves.