History

A mortgage is a loan that is taken out using a house as security or collateral. Traditionally, banks have stringent credit requirements for making mortgages. When lending began to be deregulated in the late 1970s, entrepreneurs and financiers recognized a ready market of people who could afford to make mortgage payments, but might not meet other stringent conditions required by traditional banks and lending companies. This market was called the sub-prime market because the lenders did not meet “prime” conditions. Because they aimed their mortgage products at lenders who did not have perfect credit, their mortgages became known as “bad credit mortgages.”

Types

Finance companies have developed a number of different types of bad credit mortgages. Most of these types have features that intersect, and every lender has their own definitions and names for their loan, but these are some of the most common types of bad credit loans available.
Fixed Rate Mortgages feature an interest rate that doesn’t change over the life of the loan. Because lenders are taking a greater risk in lending to someone with poor credit, the fixed interest rate is usually several percentage points higher than the typical interest rate for a comparable mortgage.
Adjustable Rate Mortgages (ARMs) have interest rates that are based on an external number. For instance, a bank may “index” their mortgage interest rate to the Federal Reserve’s interest rate for interbank lending, which is the interest rate banks charge when they lend money to each other. In deciding their rate, the bank will add a specific number to the index rate.

Hybrid ARMs usually start as a low interest fixed rate mortgage which is called a teaser rate. After a specified period of time, usually either two years or five years, the mortgage “resets” to become an ARM at the bank’s current adjustable interest rate.

Features

Banks and finance companies have come up with many features to make bad credit mortgages attractive to borrowers. You shouldn’t expect to find all of these features in one loan. Most mortgages only have one or two of these features.

Low Introductory Rates, or “teaser” rates, are often used in hybrid ARMs to make it easier for lenders to qualify. No Down Payment loans were originally designed for people who have enough income to cover mortgage payments, but not enough to save a substantial down payment on a new house.
No Income Verification mortgages are also sometimes called Stated Income loans. They were designed for people whose income is difficult to prove. A mortgage that features No Income Verification doesn’t require you to submit pay stubs, W-2 forms or any other kind of verification of your income.
No Income No Assets, also known as NINA loans, don’t even ask how much you make or what assets you own. They’re decided solely on the basis of your credit history, the value of your property and the value of the property.

Interest Only loans give you the option of paying only the interest for a period of time at the start of the loan. Interest Only loans are often combined with a scheduled Balloon Payment, when the total amount of the loan is due.

Benefits

A bad credit mortgage can make it possible for a borrower who has very little credit history to get a mortgage and start establishing their credit history. They are also useful for people who have had financial troubles in the past and can’t be approved for a loan by a traditional lender. They also can make it easier for people who are paid on commission or who lack records to verify their income to buy a home or get a second mortgage on their current home.

Warning

Predatory lenders are those that take advantage of borrowers who may be desperate to get a loan from any source. They may misrepresent their loan terms or even lie on loan applications without the borrower’s knowledge in order to get the loan. These are some ways to avoid becoming the victim of a predatory lender.

Check the lender’s credentials with your local Better Business Bureau and your state’s lending regulatory agency.  Insist on reading the completed loan application before signing anything. Double check the loan application to make sure that the lender wrote down the correct figures for your income.
Never sign any form that is not completely filled out. If there are blank lines or fields on the application, insist that they be filled in or crossed out in some way.

Considerations

Adjustable Rate Mortgages may be attractive because of the low introductory rates, but the monthly payments can become suddenly unaffordable when the mortgage rate resets. The mortgage contract will specify if there are any ceilings or limits on how much the interest rate can be increased in one adjustment. Be sure that you understand how expensive your mortgage can get before you agree to it.

Insight

The abuse of bad credit loans and sub-prime mortgages are considered to be largely responsible for bringing the entire world finance and banking industry to the brink of total collapse in 2008. While bad credit mortgages continue to be available, lenders have tightened their requirements and restrictions considerably since that time.