The ABCs of Bad Credit Mortgages

Rough times may have ruined your credit, but unless you had a foreclosure just yesterday, there are many lenders willing to loan you money to buy a home.

People with bad credit, or no credit, are eligible for "sub-prime" loans, which are readily available on the mortgage market. Some lenders offer only prime loans, some only sub-prime. Many offer both.

Grading loans (and borrowers)

Prime loans, or Grade A loans, go to people with good credit, good income, and little debt. Everybody else gets a subprime loan. A lender grades a borrower according to the risk it faces in making the loan. Subprime borrowers can be Grade A-, all the way down to Grade D.

Different lenders measure risk differently, and may put you in different categories. That's why it pays to shop around. You want your grade to be as high as possible. The lower the grade, the higher the interest rate is likely to be, and the less desirable the loan offers.

The lender probably will never tell you your grade, but you'll be able to see the differences it generates in the terms of their loan offers.

Predatory lenders

Predatory lenders take advantage of borrowers in weak positions in many ways. They may charge exorbitant or unjustified fees. They may encourage a borrower to lie about his situation in order to qualify for a loan, or lend more than the borrower can reasonably afford to repay.

Some borrowers may be pressured to accept loans that put them at higher risk of default, such as loans with balloon or interest-only payments, or loans with steep pre-payment penalties.

Keys to bad credit loan success

To find the best loan, it's essential to comparison-shop. By doing so, you'll increase the chance that you'll spot a predatory lender simply because his offer is out of line with others.

Finding a sound bad credit mortgage takes some care, but it's well worth the work. Buying a home and managing your mortgage well will help repair your bruised credit. A bad credit loan can help put those rough times behind you.