Real Estate

Sub-Prime Borrower Mortgage Options

Bad credit mortgage optionsSince the sub-prime mortgage crisis, it has gotten difficult for those with bad credit to secure mortgages.  Now, this might actually be a good thing, because many that have bad credit shouldn’t be purchasing homes.  That was the reason why we even had a sub-prime mortgage crisis.  People were being loaned money that they couldn’t ever pay back.  Now, that the economy is ramping back up and real estate is on the rise, people are looking for mortgages.  They might be looking, but it is hard to find a mortgage.  Luckily, there are options for those with bad credit.

Now, you might tell me that people with bad credit shouldn’t purchase homes.  I would generally agree with this sentiment, but I have met quite a few people in my years that had bad credit, but their balance sheet was strong.  Why?  They had bad things happen in the past that affected their credit score and it just hadn’t come back up.  With a bad credit score, they were considered sub-prime borrowers with many banks.

What Does It Mean to be Sub-Prime?

There are typically a few reasons why people are considered sub-prime.  Now, these factors are all different depending on where the loan is trying to be obtained.  These are just a general rule.

  • A low credit score – typically less than 650
  • History of late payments
  • Bankruptcy
  • Foreclosure or charge-off
  • DTI (Debt-to-Income) ratio too high (50% or above)
  • Bad income to expense ratio

As you can see, there are quite a few reasons why someone would be a sub-prime borrower.  Now, if you have a DTI that is too high or a high expense to income ratio, then you shouldn’t be looking for a mortgage in my opinion.  If you have had a bankruptcy or a bad credit score, then I think you could still be eligible to get a mortgage.

Sub-Prime Mortgage Options

As I stated, there are still options available for sub-prime borrowers.  Yes, it can be a little more difficult to secure a mortgage, but it can be done.  Before you go searching for a mortgage lender, make sure you understand your credit score and credit report.  I recommend Credit Sesame for checking your credit score for free.  If you have already used annualcreditreport.com, then you will need to check out Equifax or TransUnion.

Once you make sure that your credit report is OK, then you need to look for lenders that will be willing to let you borrow money.  As stated, it is going to be difficult to find someone to give you money if you are sub-prime.  You could go out and look for lenders one by one, but that wouldn’t be productive.  You need to search for lending services in a quicker fashion and with more lenders.  You want higher numbers of lenders in order to increase your chances for approval.  In order to do this, you should look to a mortgage broker or service that can help you find multiple offers.  If you want to start your search, try Loan Lenders or if you are in the UK, try Just Bad Credit.  These two services should be able to help you.

You need to make sure you understand that you will pay more for your mortgage loan.  You will get a higher interest rate than what is advertised, you will most likely have to pay private mortgage insurance (PMI), and you could even have other fees.  Be aware of this situation and calculate these into the overall payment.

Work to Change Your Situation

While you might be able to get a mortgage loan when you have bad credit, you should still work hard to make sure and change your situation.  If you have bad credit, you need to understand why and figure out ways to improve your credit.  Improving your credit takes time and there is no magic bullet.  You need to get our debt-to-income ratio under control.  You have to make your payments on time, and you need to make sure not to take on any more debt.  Yes, these are simple tips, but they are very effective.  Your dream of owning a home doesn’t have to wait until you have great credit, but you should certainly work hard to change your current situation.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

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Grayson Bell

Grayson Bell

I'm a business owner, blogger, father, and husband. I used credit cards too much and found myself in over $75,000 in debt ($50,000 in just credit cards). I paid it off, started this blog, and my financial life has changed. I now talk about fighting debt and growing wealth here. I run a WordPress maintenance and support company, along with another blog. It is Empowered Shopper, which helps people get information about products they want to buy. You can also check out Eyes on the Dollar, which is a great blog that I co-own.

22 Comments

  1. September 6, 2013 at 5:44 am — Reply

    Considering the impact of just one point interest rate over the life of a loan I would try to wait for a few months to improve my credit before trying to borrow again, it would save a lot of money to get a slightly better rate.

    • September 11, 2013 at 10:32 am — Reply

      I would do the same thing, but not everyone has our patience Pauline.

  2. September 6, 2013 at 5:53 am — Reply

    Nice to have an actual definition of sub-prime. We’ve heard it every day in the news for the past five years without ever having a definition.

    I completely agree that people should try to get out of the sub-prime category rather than spending their efforts trying to obtain a mortgage.

    • September 11, 2013 at 10:33 am — Reply

      This is showing that they can do both. Now, that is different than saying that they should.

  3. September 6, 2013 at 7:12 am — Reply

    I agree with Pauline. It’s better to wait until you have a higher credit score so that you have access to better lending terms. That’s just my opinion, though.

    • September 11, 2013 at 10:34 am — Reply

      That is also my opinion. This post was to show that people have options, but I would tend to agree with you as well.

  4. September 6, 2013 at 8:30 am — Reply

    If you have bad credit, the first step is to really understand why. Chances are that you either currently have or in the past had bad financial habits. Before you take on any kind of huge financial commitment like a mortgage, you need to make sure that you work on improving those habits. A good credit score or a mortgage shouldn’t be the end goal. Strong financial habits should be the end goal. The rest will take care of itself.

    • September 11, 2013 at 10:34 am — Reply

      Hit the nail on the head as usual Matt.

  5. September 6, 2013 at 8:40 am — Reply

    Our debt to credit ratio is below 50% but it’s still high so even though we have good credit, we probably would not qualify for a great interest rate if we tried to buy a home. I’m a big proponent in being patient and waiting for a financial situation to get better if you can.

    • September 11, 2013 at 10:35 am — Reply

      I would agree. I was just trying to show that there are options out there.

  6. September 6, 2013 at 8:56 am — Reply

    I would tend to agree with Pauline, but have seen several get subprime loans and have it work out well for them. We actually know someone who declared bankruptcy several years ago and was able to buy a house and the kicker is there rate is better than ours.

    • September 11, 2013 at 10:35 am — Reply

      I am with you there my friend.

  7. September 6, 2013 at 6:49 pm — Reply

    Hey Grason, I love the post! It’s amazing how many people don’t know about sub-prime options. Most people who would have sub-prime credit rent because they don’t think they can do any better. Thanks for bringing the option to light! I’ve gotta say, my favorite part is the Work To Make Your Situation Better section. So many people are so downed by their credit problems, they forget that they have the ability to dig themselves out with nothing more than a bit of determination.

    • September 11, 2013 at 10:35 am — Reply

      Thanks for the kind words Joshua. I appreciate it.

  8. September 7, 2013 at 7:57 am — Reply

    Great stuff here, Grayson, and I agree with you; sometimes people who’ve had a troubled financial past really have learned their lesson and are ready to take on a mortgage again. When I was in the lending field, 1 year of clean credit and a strong balance sheet was all it took to retain a mortgage again.

    • September 11, 2013 at 10:36 am — Reply

      Thanks Laurie. I do think people should wait, but I wanted to show them that there are options.

  9. September 7, 2013 at 12:01 pm — Reply

    As for me, I agree with Pauline, I would rather wait to have a higher credit score and working hard is the best way to get out of financial trouble and improve the situation. Nice post though.

  10. September 8, 2013 at 9:21 am — Reply

    Great post Grayson, I think a desirable credit score is coming back into vogue. Back in 2007-08 having a high credit score meant nothing cause you could still get a loan, very easily. The market has changed and people better take notice and get their balance sheet in order.

    • September 11, 2013 at 10:36 am — Reply

      You are right Jim.

  11. September 8, 2013 at 10:45 am — Reply

    Very helpful post, Grayson. There are a lot of people who probably shouldn’t rush into a mortgage because of their credit. It really doesn’t take that long to repair your credit simply by the passage of time and on-time payment history. That extra time gives you a chance to get a lower interest rate through a better credit rating and to save more for your downpayment.

    • September 11, 2013 at 10:36 am — Reply

      I certainly agree Betsy. I just wanted to provide some options as that is always more helpful.

  12. Sam
    February 25, 2015 at 2:58 pm — Reply

    Hi Grayson
    Great post! Just want to add that although the subprime loans are options for people with bad credit who need financing and do not want to wait for their score to improve, there are other options now available. For instance self employed people have had a hard time getting a loan because they write off as much as possible so their tax returns do not necessarily show their true financial picture. The stated income loans (which have made a come back) are an option for these borrowers.

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