Smart Borrower Center
Tools to help you borrow better
As the name implies, bad credit mortgages -- also known as sub-prime mortgages -- are offered to people whose credit is less than stellar. This may include people who have a recent foreclosure, or those who don’t make enough money to qualify for a conventional mortgage. People who don’t have a long credit history might also be forced to get a bad credit mortgage, since lenders use credit scores to help determine risk.
That doesn’t mean it is impossible to get a mortgage. But a bad credit mortgage will include a hefty premium in the form of high interest rates. That increases the cost of borrowing, which could ultimately make it harder for borrowers to stay current with their payments.
Some lenders specialize in making loans to borrowers with low credit scores. Compare lenders to see which might be able to work with you, and be sure to learn the terms of bad credit mortgages.
Also be wary of what the Federal Trade Commission calls predatory lenders: those that charge fees and interest rates higher than what is necessary to protect their investment, even for a bad credit mortgage. Federal law prohibits many predatory lending practices, but not all bad lenders get caught before they do damage to well-meaning borrowers.
One alternative to a bad credit mortgage and its high interest rates and fees is a Federal Housing Administration (FHA) mortgage. Because the federal government guarantees the loan, lenders may be able to offer interest rates that are only slightly higher than market rates -- and certainly lower than those for a bad credit loan.
The FHA may look more kindly at credit blemishes than traditional lenders, taking into account why you had credit trouble. Depending on your overall history, you may be able to qualify for an FHA loan just three years after a bankruptcy, rather than four years, which is typical with a conventional loan.