Understanding High Risk Mortgage Lenders

Some people are unfamiliar with high risk mortgage lenders. On the other hand, if your credit rating is poor, you are probably quite familiar with these types of lenders. Even more, you may have used a high risk lender to finance your home purchase. High risk mortgage lenders function like other types of lenders. The only difference is that these lenders approve loans to persons who cannot receive traditional financing. Banks, credit unions, and mortgage companies provide traditional financing. While common, getting approved by traditional lenders is difficult. For the most part, applicants must have good credit, a down payment, and funds to cover closing fees.

High risk mortgage lenders recognize that it is impossible for everyone to have good credit. Moreover, saving the custom 20% down payment is nearly impossible due to rising costs of living. Even though high risk lenders provide an invaluable service, there is a downside. Prior to applying with a bad credit, high risk, or sub prime mortgage lender, consider the advantages and disadvantages.

Advantages of a High Risk Mortgage Lender

1. Buy a Home with Bad Credit – The main advantage with using a high risk lender is that applicants are given the opportunity to own a home. The mortgage process is long and stressful. Before final approvals are issued, an applicant’s credit history, work history, income, and debts are closely evaluated. Meeting a traditional lender’s requirements is very difficult. Yet, high risk mortgage lenders approved applicants with credit scores as low as 600, high debt-to-income ratio, self-employed, etc.

2. Opportunity to Better Credit Score – Owning a home looks good on a credit report. In fact, many people have been able to greatly improve their rating by paying a mortgage. Once the mortgage loan is approved, make an effort to submit prompt payments each month. After six months of making mortgage payments, your credit score will gradually increase.

Disadvantage of High Risk Lenders

1. High Interest Rate – Even though high risk lenders are intended to help persons with bad credit buy a home and re-establish their credit, their services are not without a price. A bad credit history means paying a higher rate for auto loans, credit cards, and mortgages. The interest rate will depend on credit rating. In some cases, high risk lenders can approve applicants for a comparable rate. On the other hand, persons with very low scores may pay up to two or three points above current averages.

2. Recognizing Deceitful Lenders – It is important for homebuyers to choose a high risk lender with a good reputation. There are numerous dishonest lenders looking to take advantage of bad credit applicants. Even though your home loan choices are limited, this does not justify unfair practices. The only way to avoid a dishonest lender is by researching different home loan programs, and comparing the rates and fees of multiple lenders.