Back to Blog

What To Know About Bad Credit Mortgages

General Faizal Garasia 9 Oct

What To Know About Bad Credit Mortgages

The primary difference between a bad credit mortgage and a normal mortgage is that a bad credit mortgage is typically for people who have a history of bad credit. Many people end up with bad credit due to bankruptcy, not making loan payments, or other issues. Others are taken to court or have been reported to credit agencies. These mortgages are also known as credit impaired mortgages or a poor credit mortgage.

Because the competition between banks is fierce, many institutions have been looking for ways to maximize their profits. Because many people have bad credit, this have left open a huge market which for many years was untapped. Banks begin to realize that by offering bad credit mortgages, they were capable of increasing their profits. In the past most lenders have rejected people who had less than perfect credit.

The interesting thing about these mortgages is that the interest rates and terms are the same as you would find with standard mortgages. There are mortgage companies today that cater to those with bad credit. These mortgages are typically given to people who have had a bankruptcy, criminal charges,  or other financial problems. While the interest rate for these loans was high in the past, they have know come down to levels which can compete with standard mortgages.

Mortgage to bad credit

You may be wandering why banks and mortgage companies would suddenly decide to start offering mortgages to people with bad credit. There are a number of reasons for this. The banking industry has become more competitive with the rise of the internet and globalization. Small businesses like payday loan companies are beginning to compete with banks in many areas. Credit card companies are competing with each other to offer the lowest interest rates possible. This has led to a market which is very competitive.

Because our society is so dependent on credit, many people who have bad credit look for companies and services which cater to them. While there haven’t been many in the past, payday loan companies and other businesses are starting to tap into the market. Most banks will not give a mortgage to those who have bad credit, and this has created a market as well.

 

Lenders and Bad Credit

By offering bad credit mortgages, banks are able to tap into a market which is composed of millions of people who would normally be rejected from getting a home. Some would say that the banks are taking a risk by doing this, because people who have filed for bankruptcy in the past are likely to do so again. Though this may be true, banks and mortgage companies can make a nice profit when customers make the down payments.

If someone with bad credit puts down $10,000 towards their new home, this money goes to the bank. If they should default on their payments within a year, the bank can simply foreclose on the home to cut their losses. By this time, they would have got down payments from thousands of other customers, and this would allow the bank to earn huge profits. Banks have become proficient at avoiding losses. They are well aware of the fact that those with bad credit may default on their mortgage payments.

In the event that this happens, the lenders will simply foreclose the home and take it away from the homeowner. The homeowner will ultimately lose if they default on their payments. However, bad credit mortgages are good for those that want a second chance at owning their own home. Some people are honest, but simply make mistakes and end up in more debt than they can handle. A bad credit mortgage can be good for these people.

Each process is different depending on the scenario. Talk to us to discuss how we can approach your mortgage.