How To Assess If Your Client Qualifies For A Bad-Credit Mortgage

If you or your client has bad credit, you may be refused a loan by a bank on the first try. However, you shouldn’t let bad credit deter you from trying to get a bad credit (also known as sub-prime) mortgage. 

You do still have options, even if your client’s credit score isn’t great. Bad credit scores tend to range between 400 and 500 on the credit spectrum. 

What is a bad credit mortgage, anyway? 

Bad-credit mortgages are reserved for those who don’t quite meet the threshold for normal mortgages. Individuals with bad credit usually don’t get there themselves. They are usually the victims of a bad set of circumstances that ruin their financial health. Like divorces, job loss, injury, or identity theft. Bad credit mortgages are a pain, but they can be just your ticket to a new home, despite your poor credit score. 

What are some features of a bad credit mortgage? 

Some of the features of this bad-credit mortgage are things like a lower loan-to-value ratio – this LVR is used to determine how high your deposit would be on a home you wish to purchase. The higher the LVR, the lower your deposit might be. LVRs are assessed based on your financial history and the risk associated with a bank lending you money for the said deposit. If you wish to calculate your own LVR, you may do so online.

Typically, bad-credit mortgages have higher fees associated with them. They have higher legal fees, higher application and valuation fees, and conveyancing fees. People who don’t have bad credit will likely not have to worry about so many of these fees.

Another bad credit mortgage feature is higher interest rates. Higher interest rates can be a real pain for those who’re looking to get some financial stability back in their lives with a bad credit mortgage.

While these might be worrisome for you as a borrower, it’s problematic for the lender as well, as they are essentially risk-assessing your financial history. Don’t worry too much about these features, just make sure you make your payments on time. 

Do I qualify for a bad credit mortgage? 

The simple answer to this question is: it depends. It depends on your circumstances. Your best bet would be to approach a bank and ask the question. However, polling suggests that poor financial management is most prevalent among younger people, particularly those aged between 18 years and 24 years. That’s why it’s deemed critical young people are taught good financial literacy.

That aside, the question of whether or not you qualify for a bad credit loan depends on your credit score. If your credit score hovers between 550 and 650, you might qualify for a more traditional homeowners mortgage, which will save you from the headaches mentioned above. However, if your credit score hovers between 450 and 550, you might instead only qualify for a bad credit mortgage.

If you fall into the bad-credit mortgage category, take the time to meet with a mortgage broker. They may be able to help you understand the nuances and complexities involved in bad-credit mortgages and their stipulations before you make such a huge financial decision. 

I’ve been approved for a bad credit mortgage. What now? 

Congratulations on your approval! But what now? The best thing you can do for yourself, even though you might be worried about the high fees, interest rates, and so on and so forth, is to make sure that you make your payments on time! One of the worst things you can do is to show even further financial instability and untrustworthiness. Remember, the bank is putting money in your hands and can take it away at any time. 

Continue to make payments on time and if you’re struggling to do that, explore other financial options such as refinancing, or maybe consider selling off some other assets to help you raise the necessary capital. 

If you don’t think you can afford a bad credit mortgage, then you can and probably should choose not to buy a house at this present moment in time. Instead, consider continuing to rent. It’s crucial you make the right financial decision when it comes to bad credit mortgages. The last thing you want is for your bad credit score to suffer even further because you made a poor choice.