Aside from the risk of dealing with a predatory mortgage lender and paying a higher mortgage rate with less favorable loan terms, there’s nothing wrong with Sub Prime mortgage loans. You should however, try to get a mortgage from a conventional mortgage lender before considering a sub prime lender.
Mortgage loans are designated by the lenders alphabetically based on the applicant’s credit. Mortgage loans for homeowners with good credit are often referred to as “A” loans; however, sub prime mortgages have their own grading system ranging from A- to F. The designation “A-“is the best of the sub prime ratings and D through F have the worst credit. Consequently loans with D, E, or F ratings cost the most because of increased risk for the lender.
If you’re considering a Sub Prime mortgage you should know that lenders look closely at your mortgage and rental payment history when approving your loan. The variety of products you will encounter when shopping for a bad credit mortgage is very similar to those offered by conventional mortgage lenders. Some mortgage offers in the A- category may require a minimum credit score of 600 and that you don’t have any 30 day late mortgage or rent payments.
Mortgage payments are easily documented on your credit history; however, rental payments are not. If you are currently renting the lender may ask for documentation showing you have been making your rental payments on time. Cancelled checks or bank statements can be used for this documentation. “B-“sub prime mortgages usually require a minimum credit score of 560 and “C” grade loans go as low as 520.
If you have a recent Chapter 7 bankruptcy on your record you can expect to fall in a D grade category or possibly lower. Don’t let these different grades of mortgage loans discourage you; if your credit score qualifies you for a C grade mortgage you still negotiate for a better mortgage rate by paying the lender a point or two at closing. You can learn more about your bad credit mortgage options, including costly mistakes you need to avoid with my free, six-part mortgage tutorial.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
