Who does not fear risk? We all do, and lenders are no different. While risk is an inherent part of business, a lender will choose risk wisely and prudently, especially when they have a choice to lend on multiple applications.
Understandably, many mortgage companies are reluctant to finance people with bad credit history or with little or low down payment. This is where a mortgage broker experienced with bad credit mortgages comes in. A bad credit mortgage can assist people who have bad credit score, low income, or a long history of loan rejections.
Mortgage Miracle Worker?
Not really. A mortgage broker should provide sound advice and options to you to assist you while things are not so favorable and help you to create an “exit plan” so that you can move back to conventional lending in the shortest period possible. Entering into a bad credit mortgage with no exit plan in place is never a good idea.
A mortgage broker experienced with bad credit mortgages can help you get your loan approved by mitigating circumstances and negotiating terms and conditions that make the loan viable to both you and the lender. Make no mistake, however. While a bad credit mortgage can seem like a miracle, it comes at a price. You will have to expend more money to get a bad credit mortgage. Ultimately, the loan you will qualify for will have a higher interest rate and closing fees.
When contemplating a mortgage when you are in this situation, you must evaluate your own risk reward, or more accurately, extra costs vs. potential rate of return. Will you be better or worse off?
You must also have or create an “exit plan” before you engage. By that I mean, you must set a goal to either be able to pay this loan off within a certain period or work on your credit issues, income issues, etc. so that you can qualify for a regular mortgage in the shortest period possible.
Is Your Broker Trying to Break You?
Do higher interest rates and closing fees mean your bad credit mortgage broker is pulling a fast one on you? Not at all, providing they are helping you solve the existing problem and are helping you with the short and long term picture. Mortgage brokers essentially provide a liaison between lenders and borrowers. The cost of money in this situation is higher. Mortgage brokers do not necessarily get paid more for a bad credit mortgage. The cost of money is simply higher and lenders usually charge a lending fee for these types of mortgages. However, mortgage brokers may have to charge you a fee for these types of mortgages whereas with conventional, qualified mortgages, they may not as they would receive compensation directly from the lender.
This is standard practice in the industry. You have to remember that your bad credit history makes you a greater risk than most. The only reason mortgage companies would willingly take on the kind of risk you represent is if it proves profitable for them in the end.
The Pain of Penalties
Some bad credit mortgage loans carry a pre-payment penalty. Therefore, again it is important to establish your exit plan and set your term accordingly. There is no sense paying a higher rate for 5 years when you can improve the situation in 1 or 2 years just because the present rate may be lower for a longer term. Again, this is an unavoidable pain in the neck for people with bad credit. Always opt for the loan with the shortest term that is closest to your reasonable exit plan. This way, you can pay off the loan quickly without penalty.
Don’t Worry, Just Wait
What if the rates prove too high for you? You have another option. Wait. It’s been said the best things in life are worth waiting for, and this mantra holds true for getting a mortgage even with bad credit. Wait a while before you contact a bad credit mortgage broker. Use the time on your hands to improve your credit score. When you’ve successfully done this, you can then qualify for a loan with a lower interest rate.
We can provide some free advice on how to improve your credit score. Just ask us!
Risk is terrifying, but it’s unavoidable. In applying for a mortgage, a bad credit mortgage broker can give you a makeover – from being a walking liability to a sound investment.
Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (905) 265-0246.
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