The
Points of Bad Credit Mortgage Loans
Mortgage companies are
not often willing to finance individuals with bad credit or without any money
for a down payment. However, there are some bad credit mortgage loans that help
people with low credit scores, or low income obtain financing for a new home.
The bad credit lenders help individuals get their loans approved faster than the
programs offered by credit unions and banks. A bad credit mortgage loan will have
a higher rate of interest as well as higher closing fees. These mortgage loans
may also carry a prepayment penalty for the borrowers, and have six months to
a two to three-year prepayment penalty. So, the borrower will have to pay a large
sum of interest for at least six months before they pay off the loan.
Bad
credit mortgage lending is also known as the sub-prime market, or b.c.d credit
lending. Bad credit mortgage loans are not like the type of mortgage loans that
are available to borrowers with good credit. The bad credit mortgage loans have
higher interest rates and origination fees on the loans, but there are limits
to the amounts of these fees, which are deemed as proper in the mortgage industry.
Points are used to express the amounts that must be paid by borrowers, and these
points represent a fee corresponding to 1 percent of the amount of the loan. Individuals
with good credit may have no points, while individuals with bad credit may have
four or five points. There are some bad credit mortgage loans that may charge
some individuals as much as ten points. For example, a loan of $150,000 with ten
points will charge the borrower $15,000, but this is often uncommon, and consumers
should be wary of these loans with more than five points.
High points on
a mortgage loan are a red flag that the lender may be trying to take advantage
of the situation, and many consumers are best avoiding these situations. Finding
a broker or lender that offers a bad credit mortgage loan may be difficult and
requires some extra legwork, but persistence will bring up many sources for these
types of loans, and lenders that don't have incredible origination fees. Points
on a mortgage loan could cost individuals with bad credit thousands of dollars.
These points may also be known by many names, including origination fees, discount
fees, broker fees, or yield spread premium. There are two forms of points on bad
credit mortgage loans, which are Upfront Points.
Upfront Points are paid
to the lender or the broker as compensation for creating the loan transaction,
and may represent the brokers' only source of income. Borrowers have the option
of paying more points to "buy down" the rate of the loan. Back End Points
are the second form of points that are offered on bad credit mortgage loans. Typically,
lenders pay Back End Points to the mortgage broker, and these points may represent
an addition incentive from the lender to the broker to make a certain loan. The
back end points may also be used as payment from the lender to the broker as a
reward for obtaining a loan with a higher interest rate. For instance, a borrower
may only be able to obtain a loan with a 10 percent interest rate, but the broker
may only offer an 11 percent interest rate to the borrower, in order to receive
two extra back end points from the lender.
