(Updated Oct. 2014)
Bad credit is a major problem in this country. With millions of people thrown out of work or seeing their businesses suffer during the Great Recession, many found themselves unable to pay their mortgages and other debt payments and saw their credit ratings take a huge hit as a result.
How common is bad credit? According to the Fair Isaac Corporation, which developed and maintains the widely used FICO credit scoring system, nearly one out of four consumers have credit scores below 600. That's a level where few lenders are willing to approve mortgages, but also represents a huge chunk of the population that is in need of housing.
So what do you do if you have bad credit and are looking to get a mortgage and buy a home? The good news is that there are still lenders who will do business with bad-credit borrowers. The bad news is that they may be difficult to find.
Bad-credit lending today
Prior to the recession, bad-credit mortgages were plentiful and easy to find. Many of them were structured in a variety of flexible and creative loan programs, packages, rates, and payment options. Unfortunately, many of these were put together in ways that greatly increased the likelihood that the borrower would default on the loan and send the mortgage into foreclosure, a key factor that led to the eventual crash of the housing market.
These days, lenders are much more careful about who they will extend credit to. That's not a completely bad thing, because it means you're far less likely to run into an unscrupulous lender who'll give you a mortgage you can't afford, as often happened during the housing bubble, when lenders could still make money even if the loan went into foreclosure.
If you have bad credit, today's lenders will likely require compensating factors before granting you a mortgage, such as a larger down payment, proven financial reserves or a low debt-to-income ratio (percentage of your income that the mortgage payment will require). You'll also pay more - a borrower with a credit score in the low 600s can expect to pay a substantially higher interest rate and fees than someone with excellent credit would be charged.
As a bad-credit borrower, finding a lender who meets your needs and can give you relatively good terms on a mortgage can be a challenge. First, you may find that many lenders are simply not interested in dealing with borrowers with your credit profile. Second, the lenders who will do business with you may vary greatly in what they charge and the terms they offer.
How a broker can help
This is where a mortgage broker comes in. Mortgage brokers don't make loans themselves, but specialized in helping borrowers find the lender that's best suited to their needs. Rather than offering the mortgage products of a single company, they have business relationships with an array of borrowers that allows them to offer a mortgage product tailored to the borrower's needs.
A bad credit mortgage broker will be able to offer various mortgage products that fit a variety of situations. One loan may work well for a borrower with a credit score in the upper 500s but who has substantial income and can put down a hefty down payment. Another may have a lower interest rate and be available to a borrower with a score in the low 600s. Another may work for someone who has fewer financial resources, but is willing to pay a higher interest rate.
Since the choices can be overwhelming, bad credit mortgage brokers-professionals who represent numerous bad credit mortgage lenders-can help you put everything into perspective. Instead of running all over town shopping for ahome equity loan or mortgagerefinance, seek out a broker who focuses only on clients with credit problems. You may not find one in the same place where other traditional lenders congregate, but they're out there waiting to serve you.
Bad credit mortgage broker tips
You can locate bad credit mortgage brokers by asking friends or professional credit counselors for recommendations, by contacting bad credit brokers who advertise in local newspapers and yellow page listings, or by browsing the Internet. Once you've compiled a list of these specialists, check their credentials with the Better Business Bureau, and interview them to determine which one is the most qualified and resourceful. Such a person can help you get the type of loan you need at the best price.
The larger number of loans that you have to choose from the better off you'll be, so inquire about various lenders in your broker's business network. Even mainstream banks are getting back into the bad-credit mortgage game. If a broker is proactive and does a healthy amount of business, he'll have fresh data on a variety of lenders.
A good broker is entitled to reasonable compensation. However, he shouldn't pressure you to borrow more than you need, or accept rates that aren't the lowest available. Ask him to explain his fee structure-if he refuses, find someone else.
You may happen to have a low credit score, but that doesn't mean you have to settle for poor service. With a little bit of legwork, you can find a good bad credit mortgage broker to help you along the path.