Mortgage Rates On Bad Credit Loans With Low Credit Scores

This BLOG On Mortgage Rates On Bad Credit Loans Was UPDATED And PUBLISHED On February 13th, 2020

Mortgage Rates On Bad Credit Loans

Are mortgage rates on bad credit loans higher?

  • Having bad credit does not affect mortgage interest rates
  • Credit Scores do
  • This is especially true on Conventional Loans
  • Conventional loans do affect mortgage interest rates more so than government loans

In this article, we will discuss and cover the impact on bad credit and lower credit scores have on mortgage rates.

What Determines Mortgage Rates

Here are what determines mortgage rates on Conventional Loans:

  • Credit Scores
  • Types of property
  • Occupancy: Owner Occupant, Second Homes, Investment Homes
  • Loan To Value
  • Loan Size

Having prior bad credit such as collections, late payments, bankruptcy, foreclosure, deed in lieu of foreclosure, a short sale has no impact on mortgage interest rates.

Government Loans

Government Loans are mortgages insured by a government agency.

Here are the three government loans:

  1. FHA Loans insured by the Federal Housing Administration or FHA
  2. VA Loans which is insured by the Department of Veteran Affairs
  3. USDA Loans which is insured by the Department of Agriculture Rural Development

What Determines Mortgage Rates On Government Loans

What Determines Mortgage Rates On Government Loans

Here is what determines mortgage rates on government loans:

  • Credit Scores
  • Type of property
  • Loan size
  • Manual Underwriting
  • Down Payment does not affect rates due to government guarantee

There are no loan level pricing adjustments on the down payment when it comes to government loans.

Does Prior Bankruptcy Affect Mortgage Rates On Bad Credit Loans

Prior bankruptcies and foreclosures do not affect mortgage rates on government and conventional loans.

Borrowers who filed Chapter 7 bankruptcy have a mandatory 2-year waiting period before they can qualify for an FHA insured mortgage loan.

  • This 2 year waiting period clock starts ticking from the date of the discharge of the Chapter 13 bankruptcy and not the filing date
  • Borrowers who have a foreclosure, there is a 3 year waiting period from the date of the sheriff’s sale or the date the deed foreclosed home is transferred out of their name
  • The date that the deed is transferred out of homeowner’s name is crucial

Most lenders take their time in transferring a homeowner’s name out of the deed and transferring into theirs.

Mortgage Rates On Bad Credit Loans Depends On lenders

Mortgage rates are not necessarily higher for bad credit borrowers than those with good credit.  FHA insured mortgage rates on bad credit loans depend mainly on credit scores of borrowers.

  • Late payments, collections, judgments, charge offs, tax liens, or high debt to income ratio has no impact on mortgage interest rates on FHA Loans
  • Borrowers with credit scores of 580 FICO or higher can qualify for 3.5% down payment FHA Loans

An FHA Borrower with a 580 credit score will have higher mortgage rates than a 700 credit score borrower.

 Mortgage Rates On Lower Credit Scores Are Higher

Why mortgage rates at lower credit points are higher

Borrowers with credit scores that fall below 580 FICO will have higher mortgage rates.

  • Mortgage rates on bad credit loans with lower credit scores are higher because lenders associate lower credit scores with higher risk

Borrowers who are mortgage rate-sensitive should optimize their credit scores before applying for a mortgage.

 Mortgage Rates On Conventional Loans

Conventional mortgage rates on bad credit loans are affected by the borrower’s credit scores.

  • The higher the credit score, the lower the interest rate on conventional mortgage loans
  • Those who have just filed bankruptcy 2 years ago or had a foreclosure 3 years ago they can qualify for FHA Loans
  • Gustan Cho Associates offers non-QM loans
  • NON-QM Loans does not have any waiting period requirements after bankruptcy and/or foreclosure
  • Most conventional loan programs have a long waiting period
  • 4 year waiting period after Chapter 7 Bankruptcy, recorded date of deed in lieu, and short sale to qualify for Conventional Loans
  • 7 year waiting period after the recorded date of foreclosure to qualify for conventional loans

Home buyers or homeowners who have questions on mortgage rates on bad credit loans, please contact us at 262-716-8151 or text us for faster response Or email us at gcho@gustancho.com.

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