Bankrate.com states the current interest rate for a 30-year fixed mortgage is 3.66%, but what is the likelihood that a...
Bad Credit Home Loans
Many Americans want to fulfill the American dream and purchase a home loan. But with 15% of the US population with bad credit, many can find their dream of homeownership out of reach. For these bad credit borrowers and others, a bad credit home loan is the best (and sometimes only) option for purchasing a home - other than saving and paying cash for the entire home.
What is bad credit?
Bad credit is the result of negative information reported on your credit report; the bad information can be late payments, large amounts of outstanding debt, and debts in collection. A credit score is a 3-digit score statistically generated from information on your credit report. Your credit score signals to a lender whether or not you are a responsible borrower. A low credit score denotes that you have probably have poor credit habits and are less likely to repay a debt. That's a higher risk to the lender -- and they pass the price of that risk on to the bad credit borrower.
Bad credit home loans are an alternative home option that gives borrowers with bad credit the opportunity to own a home.
Bad Credit Home Loans
As with any other loan, a lower credit score goes hand-in-hand with a higher interest rates. Interest rates contribute some of the largest costs of a loan, and a higher interest rate can make your loan much more expensive in the long run. (The other major contributing factor the price of a bad credit loan, in addition to the interest rate, is the actual amount of the loan).
Bad credit home loans are a big financial commitment and it is best to be well-informed when deciding on a bad credit mortgage loan. The following mortgage options may be available to bad credit home loan borrowers:
- Fixed-Rate Mortgages (15-year and 30-year)
- ARM (Adjustable Rate)
- Interest Only Mortgage
- Option ARM
- Balloon Payment
- Government Loans (FHA, VA, USDA rural development)
Fixed-rate mortgages refer to the mortgage loans interest rate, which is fixed at the start of the loan (hence the "fixed-rate" adjective). The interest rate on a fixed-rate loan does not change because of market fluctuations or changes - it's a fixed commitment. A fixed-rate mortgage is the most popular mortgage in America because it is usually the cheapest.
15-year and 30-year fixed are the most common repayment times for a loan (also known as the loans term). A 15-year fixed-rate loan may be half as long as a 30-year mortgage, but a 15-year fixed-rate payment is usually about 1/3 to 2/3's more expensive than a 30-year-loan (a 15-year fixed-rate loan is not necessarily twice as expensive as a 30-year-loan). Because a 15-year loan is paid off 15 years earlier than a 30-year loan, the borrower pays less interest on the loan.
Because a 30-year loan represents a longer span of time (and is thereby riskier), a 30-year-fixed-rate loan usually has a higher interest than a 15-year loan (since the term is shorter for a 15-year loan).
Each payment with a fixed-rate mortgage pays off some of the principal and some of the interest.
ARM (Adjustable Rate Mortgage)
An adjustable rate mortgage (ARM) is a loan where the interest can change based on changing market conditions. ARM interest rates are tied to a specific market index and change as that index changes.
ARMs can be difficult to manage because the monthly payment can change based on interest rates: if your interest rates increases, your monthly payment also increases. If your interest rate drops, your monthly payment drops.
ARMs usually have a fixed term at the beginning of the mortgage during which the rates cannot change. ARM payments always pay off the principal and the interest of the loan.
With an interest-only mortgage, you do not actually pay off the loan - you only repay the interest on the amount borrowed. Interest-only mortgages are frequently used by real estate investors to purchase properties that they will then resell at a higher price.
When the term of the loan ends, the borrower is required to repay the principal of the loan - which can be a huge payment shock.
An option ARM is an ARM with the option of making full payments, interest-only payments, or negative amortization payments. Full payments pay down interest and principal; Interest-only payments function exactly like an interest-only loan. Negative amortization payments do not cover your principal or the amount of interest charged each month; instead, you pay a minimum payment that increases the price of your loan.
Balloon payment mortgages are structured like 15-year fixed-rate mortgages but they are repaid in 5 to 7 years. At the end of the loan, you must repay the loan in cash or refinance the mortgage.
Government loans are special loans issued by various government organizations. There are several different types of government loans:
- FHA Loan
- VA Loan
- USDA Rural Development Housing Loan
An FHA (Federal Housing Administration) loan is a government-guaranteed loan that is designed for first-time home buyers with moderate to low incomes. FHA loans have easier qualifications and smaller down payments (3%, compared to 10% or 20%) - but you must occupy the property purchased with an FHA loan for an extended period of time.
Like the FHA loan, a VA loan is a government-guaranteed loan from the Veteran's Administration. It is only available for active service members of the military, veterans or surviving spouse of an active members of the military . VA loans are cheaper than traditional loans and require lower down payments.
USDA Rural Development Housing Loan
Sponsored by the US Department of Agriculture, the USDA Rural Development Housing Loan is government-guaranteed and intended for people living in approve Rural Development areas. The USDA loan usually does not require mortgage insurance or down payments - and it has easier qualifications.