Bad Credit Home Loans - Can Make a Comeback?

Can High-Risk Home Loans Make a Comeback?

Today, high-risk mortgages or bad credit home loans are becoming more popular among people of all ages. The trend is prevalent among the younger generation who may not have the means to buy a home outright or borrow against their current home.

The risks in these loans include risk of default, risk of non-occupancy, and possible interruption of the borrower's credit history.

Fico Score Distribution



Does forbearance lower your credit? 

YES, and YES, it can lower your credit, depending on particular circumstances (like Covid-19) and whether or not your mortgage lender decides to or not to report the forbearance.  

So contact your lender before asking for a forbearance. Most lenders are not reporting this during Covid-19.  And, your credit will depend on your actions before and after your loan forbearance.

When you cannot afford to make your monthly payments, it can be helpful to turn to a mortgage forbearance. This allows you to delay your payment until you get back on your feet and make your payments again. This can be a tactic to protect your credit while you get on your feet.

Contact a financial advisor or a professional home loan person before making any forbearance decisions.  


What is the Importance of High-Risk Loans for Real Estate Investing?

High-risk mortgages are loans that are considered to be so risky that lenders will only offer them to the highest-creditworthy borrowers. High-interest loans tend to have higher interest rates, but there is a chance for higher returns.

Mortgage products like 'non-prime loans and 'high-risk mortgages' have been around for decades. These products were once reserved for those who couldn't afford a mortgage or were considered risky by lenders. Like borrowers with as those with low credit scores or others with past-due accounts. With technological advancements, non-prime loan rates have been decreasing over time and the risks associated with them.

The risk associated with high-risk loans is the potential for lower returns in comparison to low-risk loans. Still, there is also a chance that they could deliver higher gains if they work out, which makes them appealing to real estate investors.

The need for high-risk loans has grown significantly due to the 2008 financial crisis and stricter lending requirements. Banks are reluctant to offer these types of loans because it involves more risk than traditional lending options.



The Latest in the Risks in the Market for High-Risk Mortgages

Non-prime mortgages are becoming popular among investors. They are usually risky loans meant for people who cannot qualify for prime mortgages because of their credit history or income level. These risky loans take on riskier borrowers by providing less security or higher interest rates.

Millennials can not be entirely blamed for this new trend in high-risk loans. Still, they do not have the financial stability of other generations to make large down payments on homes, thus making them seek out non-prime mortgages to get them started in the housing market.

The risks of high-risk mortgages are not only that they are costly for borrowers but also that they can be bad for the market if overused.

How to Get a Mortgage That is Considered "High Risk" by Fannie Mae & Freddie Mac?

first-time homebuyers will likely have to deal with a mortgage lender with a risk rating different from the go-to lenders. Fannie Mae and Freddie Mac have loan guidelines that determine what types of mortgages they will or won't be able to take on.

The mortgage was a tool used to help the average American buy a home. But as the years went on, it became a tool used to make money for banks and investors who bought them from banks.

To get a high-risk mortgage, you have to have a credit score typically over 500, and for most lenders, some money down and verifiable income. However, if your credit score is too bad or you haven't been making payments on time, then you will be denied.

Mortgage Originations 2006 vs 2020 chart with credit under 620


Tips for Improving Your Credit Score

Here's what most home loan professionals have told us:

Work with a credit counselor or Home loan person to improve your score 

This is number one for a reason, don't do anything until you discuss this with a home loan professional or a credit advisor. Don't trust the internet. Seek out, professionals!

Payments on Time

Credit Balances under 30% of the limit

Pay down high balance cards to 30% or less

Check for errors on your credit report

Shop for mortgages within 30 days



What are the Major Differences Between Low-Risk & High-Risk Mortgages?

Mortgages are categorized into two types - low-risk mortgages and high-risk mortgages. The difference between the two is that high-risk mortgages typically come with higher rates of interest, which can be costly for borrowers.

The idea of high-risk mortgages is to provide lenders with a chance to make more money. Because these loans are at higher risk, they typically have higher interest rates that borrowers need to pay.

Low-risk mortgages are less likely to default and tend to be cheaper than their high-risk counterparts. Low-risk mortgages typically have lower interest rates as well as a smaller down payment required from borrowers. 

Millennials are now entering their prime working years and need to buy property to establish a financial future. But this is where the risks come for some millennials because their income is not enough to cover a mortgage loan from traditional lending sources with debt and student loans. This has led many millennials to make use of non-prime mortgage loans.



Bottom Line

Counseling can improve MOST common credit issues and DTI issues with proper financial counseling. I recommend that you seek out financial advice from a mortgage professional or an actual credit counselor. Contact us today with your real estate questions. If you ask us about credit or loans, we will refer you to a professional in that area.