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.