During the days of the housing boom, "subprime mortgages" or home loans for people with bad credit, were very popular. After the housing bust and the financial crisis of 2008, most banks stopped issuing subprime mortgage loans, and it became much more difficult for people with bad credit to qualify for a loan to buy a house.
But now the subprime mortgage market is coming back. According to this recent article in the Los Angeles Times, there are more options now than there have been since the days of the housing bubble for people with bad credit who want to get a home loan.
Here are a few tips for how to get a mortgage with bad credit:
Make a Bigger Down Payment
If you have bad credit, banks and lenders view you as a bigger risk to fail to repay the money they loan you. This means that you can lower your risk by paying more money in advance -- a down payment -- on your house. The subprime lender profiled in the article said that its customers usually have to make down payments of 25%-40% of the purchase price of a home, depending on their credit scores. For example, on a $200,000 house, a 25% down payment would be $50,000.
Be Ready for a Higher Interest Rate
Subprime mortgage loans have much higher interest rates than conventional loans. Even at a time of historically low interest rates (3% or less on many mortgages), subprime borrowers are paying interest rates of 7.95% or higher. The couple highlighted in the story are paying a mortgage interest rate of 10.9% and they made a 35% down payment. Terms and conditions will vary by lender, of course, but it’s worth knowing that when subprime mortgage loans are available, they come at a higher cost.
Prove Your Ability to Pay
During the height of the housing bubble, people were getting approved for subprime loans at an irresponsible level. People were getting mortgages even if they didn’t have jobs or any money at all – there was even a joke about “NINJA” loans for people with “No Income, No Jobs/Assets.” Today the situation is different. If you want to get a subprime loan, be prepared to show ample proof of income and have a solid work history. This is not an unreasonable expectation for a loan, but it goes to show how relatively insane the situation was during the housing bubble. But banks do their customers no favors when they give them loans that they cannot afford to repay.
The good news is America seems to be recovering from the lowest troughs of the housing bubble and bust. The housing market is improving. House prices are on the rise again. Millions of homeowners who were “underwater” on their mortgages are now getting some relief, and many other people who were blocked out of being able to qualify for a home loan are able to get a mortgage.
Even if you have bad credit, it is still possible to get a mortgage, but you need to be prepared to offer a sizable down payment, pay higher interest rates, and have your personal financial life in order so you can prove you are a good risk.