Mortgage & Credit >> Bad Credit Mortgage >> A Bad Idea
Bad Credit Home Loans - Usually a Bad Idea
by Brandon Cornett - June 13, 2008
I would like to think that bad credit home loans are facing extinction. After all, many of the companies who specialized in these types of loans are now out of business (following the subprime mortgage meltdown).
But I'm nearly certain that bad credit home loans will make a comeback in the future. I wish they wouldn't, but they probably will. Why? Because American consumers follow a predictable pattern of outrage and forgetfulness. Sure, everyone is outraged about the foreclosure crisis right now, and the fact that it was partly fueled by the bad credit home loan providers. But we are a forgetful country, so before long there will be a whole new "crop" of bad credit lenders peddling mortgage loans to people who have no business obtaining a mortgage.
Home Loans for People With Bad Credit
Before we go any further, let's define what I mean by bad credit home loans in the first place. In fact, I just defined it in the sub-headline above. As they name implies, these mortgage loans are made to people who have bad (low) credit scores. Because these kinds of credit problems suggest a financial risk, the lender will charge the person a higher interest rate than they would charge a person with good credit.
Bad credit home loans are also referred to as "subprime" — an industry term for borrower below a certain credit level.
The Truth About Bad Credit Mortgages
Some people think that home ownership should be made available to all citizens, regardless of their financial background. These people are idealists. Universal home ownership would only work under a socialist system where the collective populace "pitched in" to pay for collective homeownership. Obviously, the United States is not such a country. Our capitalist-style economy means that everyone rises or falls individually. Sorry, but that's the world we live in at the moment.
Some people simply cannot afford homeownership. Plain and simple. I wish everyone could afford it, but I live in the real world where this is simply not the case. So now we get to the subject of bad credit home loans and the people who obtain them. When a person has a bad credit score, it's usually a sign that they have trouble managing money — or at least that they have in the past. If this is truly the case, buying a home is the last thing that person should do. They should first improve their credit score and financial situation, make darn sure they can afford the payments on a mortgage, and only then seek out a home loan.
These days — following the subprime mortgage mess of 2007 - 2008 — lenders are under increased pressure to offer home loans based on a person's solid credit history. Not only that, but you also need a higher credit score these days in order to get the best interest rate on a loan. So the subprime / bad credit home loans have become virtually extinct.
If you have a bad credit score, the best course of action is to improve your score through financial responsibility. Next, you should try to reduce your debt levels as much as possible, starting with those credit card balances with the ridiculous interest rates. Start saving money too — this will help you qualify for a home loan and will also give you some emergency funds if you need them.
Lastly, be sure you understand how your mortgage loan works. This was a big problem with many of the Americans who took out bad credit home loans in the 90's. Many of those subprime mortgages were of the adjustable-rate (ARM) variety. They started with a reasonable interest rate for the first three years or so, but then they adjusted to a much higher rate because of the person's bad credit situation.
Buying a home in spite of having bad credit is rarely the best way to do. Instead, try to reinforce your financial "house" by reducing debt, saving money, and boosting your credit score. If you do these things first, you'll be in a much better position to apply for a home loan ... and you'll get a better interest rate on the loan as well.
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