Mortgage Rates On Bad Credit Loans With Low Credit Scores

This BLOG On Mortgage Rates On Bad Credit Loans Was UPDATED On June 26, 2017

Are mortgage rates on bad credit loans higher? Having bad credit does not affect mortgage interest rates. Credit Scores do, especially on Conventional Loans do affect mortgage interest 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, short sale has no impact on mortgage interest rates on mortgage 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

Here is what determines mortgage rates on government loans:

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

Does Prior Bankruptcy Affect Mortgage Rates On Bad Credit Loans?

Prior bankruptcies and foreclosures does not affect mortgage rates on bad credit loans on government and conventional loans.

Borrowers who filed Chapter 7 bankruptcy have a mandatory 2 year waiting period before they can qualify for a 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 mortgage 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 on bad credit loans are not necessarily higher for bad credit mortgage borrowers than those with good credit.  FHA insured mortgage rates on bad credit loans depends 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.
  • A FHA Borrower with 580 credit score will have a higher mortgage rates than a 700 credit score borrower.

 Mortgage Rates On Lower Credit Scores Are Higher

  • FHA 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 mortgage.  .

 Mortgage Rates On Conventional Loans

  • Conventional mortgage rates on bad credit loans are affected on the borrower’s credit scores. 
  • The higher the credit score, the lower the interest rate on conventional mortgage loans. 
  • Unfortunately, for those who has just filed bankruptcy 2 years ago or had a foreclosure 3 years ago, FHA insured mortgage loans are the only type of mortgage loans that they will qualify for. 
  • 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 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 1-800-900-8569 or email us at gcho@gustancho.com.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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