How Does a Bad Credit Mortgage Work?

How Does a Bad Credit Mortgage Work?

by Rebecca Hall on 7 Apr, 2012

A bad credit mortgage is a non-traditional home loan that people with lower credit scores can be provided with. These borrowers may not be able to qualify for a mortgage through a traditional provider and so this is often their best option.

Because of their low credit rating they are considered to be high-risk borrowers. A low credit rating could be because of a lack of credit history or previous credit problems.

Due to its difference to a traditional mortgage, the application process for a bad credit mortgage is also different, usually beginning with a mortgage broker who will take your details and then find a lender that meets your (the borrower’s) needs for a bad credit mortgage. The mortgage broker will usually receive a fee for finding you this mortgage, often from the mortgage company themselves. This saves you from contacting various mortgage providers yourself, though this is also an option.

As with all types of financial services, there are many different kinds of bad credit mortgages depending entirely on each individual’s situation. A loan officer from the mortgage company will usually help you fill out the necessary forms so that the loan you receive is suited to your needs perfectly. You will also be required to provide verifications. These may include pay slips, bills, bank account statements or investment statements. You may also be required to provide the lender with proof of the value of the property that is being mortgaged.

The verification and approval process of a bad credit mortgage is similar to that of any loan. The lender will review all the information you have submitted as well as running a credit check through one or more credit agencies. The decision will be based on a combination of factors such as the amount of the mortgage, the predicted monthly payment, your credit history and your current income. Based on all of those things, as well as the current market interest rate for traditional mortgages, the loan officer will then make their decision on the amount of the loan that will be offered to you, as well as the interest rate that you will be charged. If you don’t qualify for the particular loan you have applied for, you might be offered a different loan on different terms.

The costs involved with bad credit mortgages are similar to that of a regular mortgage, including interest payments, broker fees, loan originator fees and administration costs. You may, as part of the loan conditions, be required to take out mortgage insurance in case you default on the loan.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.