Every bank is, or was, a bad credit home loan lender. In the past, borrowing money for a home was so easy that banks would offer what were later named NINJA loans—no income, no job, and no assets. Despite the fact that they often had poor credit, no income, and few assets to their name, these borrowers all managed to find loans.
So now we need to reconcile history with the present; NINJA loans are almost impossible to find today, but there are still some lenders who are willing to lend money to those with bad credit.
In searching for a bad credit loan, we need to understand what it is that banks fear about people with bad credit. Here are a few ideas:
Inability to control finances – When banks lend money for homebuyers, they fear that people who have previously avoided dealing with their finances will do so in the future. It is far better here to have 1 bankruptcy and zero missed or 30-day late payments than a slurry of 30, 60, or 90 day late payments. Banks will forgive that one error, but not 10 of them.
Timeline – Mortgages are very long term loans. That is, a mortgage may extend anywhere from 15 to 30 years in the future. That means that you will have to have enough money at all times to make your mortgage payment. Do you think you can handle that? And should the bank be safe to think that?
Income – People with bad credit are more likely to have a fluctuating income, infrequent income, or an income that is unreliable in any other way. Of importance to any lender is the fact that you have lived in the same place before the loan for 2 years, and worked at the same place before the loan for 2 years. If you hit these two marks, you’re usually good to go.
Bad Credit Mortgages
In general, banks will make loans to bad credit borrowers with higher interest rates attached. There are, however, a few things you can do to beat these higher rates.
The best way to beat a higher than average interest rate is to put down a very large, one-time investment in your new home in the form of a down payment. In putting your money on the line, the bank recognizes that you’re willing to risk your money on yourself, so maybe they should do the same. Also, because of the way the loans work, a down payment gives buffer room between temporarily falling real estate values and outstanding loan balance.
The second best way to beat a higher than average interest rate is to accept it, and move on. Realistically, your credit score should improve over time as you make payments on the loan and your bad marks fall off your credit report. After a year or two of consistent payments, you can start looking for a refinance, which would allow you to lower the interest rate. Banks will have to account for your new found good credit, and you might see a decline in your interest rate by as much as 1-2%.
Finally, the last way to beat higher than average interest rates on bad credit home loans is to get a consigner for the loan. If, for example, you can convince a friend or family member to cosign with you, then the bank will take their credit into consideration when deciding the interest rate. Do know that you should be a good friend or family member and keep them up to date on your ability to pay the mortgage. If you don’t make routine and on-time payments, the bank can come after the cosigner’s money, which is why they give you such a low rate for getting a cosigner with good credit.