Top High Risk Mortgage Loans

If we could jump in a time machine and whisk ourselves back to 2005, if you suffered poor credit but still needed to buy a home, you could still probably get a house with little problem. The loan that you got was probably considered high risk by the mortgage lender, and the terms were probably with a high rate, but at least you could become a homeowner.

Today, after the infamous mortgage crash, it is harder to get one of these higher risk mortgage loans. Millions of mortgage defaults in a few years brought the US economy to its knees.

New lending rules set by the federal government make it more difficult for customers to get a high-risk loan, but people with poor credit can still qualify in some cases.

High Risk Mortgage Background

High risk mortgages were designed for subprime borrowers – those with bad credit and/or undocumented income. These mortgages were given out will little checking on whether the person could actually pay it.

Many high-risk mortgage loans had predatory aspects, with low rates in the first year, much higher rates in future years, and ballooning payments. The idea was that home would continue to appreciate, and the buyer could eventually refinance into a better loan. When home prices crashed, many home owners could no longer pay the higher interest rates they had and left their homes.

New Rules

Today, all residential loans underwritten by US mortgage lenders must stick to underwriting rules according to the ability to repay rule in the Dodd Frank Act.

The lender has to evaluate and prove the borrower has the ability to repay the loan. This means the lender must make a reasonable, good faith effort to check if you have the income to repay.

So, What Are Your Options Today For 'High Risk' Loans for People wth Bad Credit?

People with poor credit today who want a mortgage to have some options, but you may in some cases have a higher interest rate and a higher down payment.

The best option for most people with past credit problems is the Federal Housing Administration (FHA) loan program. FHA loans have some of the easiest and most forgiving credit requirements in the US. If you have a 580 or higher credit score, you can get a loan possibly with a 3.5% down payment. And the rate on these loans are often .25% to .50% lower than market rates. The government guarantee means lenders can take a higher risk with people with credit problems in the past.

With an FHA loan, if you have a score under 580, you probably need a down payment of 10%. To qualify for one of these loans, it is okay to have had a bankruptcy or a foreclosure in your past, but FHA will need to see that you are paying your current bills on time.

Another option is the USDA loan program. These loans are also made for people with average credit and lower incomes. To have the easiest processing, you will need to have a 640-credit score. You also need to be ok with living in a rural area as designated by USDA. These loans offer 100% financing, so getting into a home with a USDA loan can be quite easy. But again, according to new federal rules, you have to show that you have the income to pay the mortgage.

There also are some alternative lenders out there that cater to low credit borrowers. If you check with some good brokers in your area, they may be able to recommend reputable lenders that offer mortgages to people with poor credit. Carrington Mortgage is one of the more popular brands for people with poor credit; they often put buyers into FHA loans.

Another consideration with a low credit score and getting a mortgage is to go for an adjustable rate loan. A five year or seven-year ARM could be a good solution if you think you are not going to stay in the home for that long. The rate on the ARM could be .5% lower than a 30-year fixed rate loan.

References

https://www.dividend.com/my-money/bad-credit-8-ways-to-get-a-mortgage-anyway/

https://www.realtor.com/advice/finance/hard-find-high-risk-mortgage/