If you’re looking for the truth about bad credit mortgage lending, you might be shocked by what you learn. Bad credit mortgage loans are typically double or triple the cost of even an average credit score borrower. Bad credit lending hurts not only the borrower, it hurts the economy.

One of the main reasons the economy tanked in 2008 was the bad credit mortgage lending that took place. Many people blamed the borrowers, however many borrowers were duped into believing they could make payments that ultimately they couldn’t. The lenders, seeing a ripe market of heavy interest payments gave out mortgage loans with interest rates as high as 30%. Most credit cards don’t even have a 30% interest rate.

To understand how dangerous bad credit lending is, let’s take a look a few different types of borrowers. In order to figure out how lenders make the determination of your interest rate, points and other fees, it’s important to understand the main factors that determine your credit score and lending tier. There are five types of consumers: no credit history, awful credit history, bad credit, average credit and good credit. Each of those tiers has a specific delegation when it comes to credit scores and how much a lender will loan, how high the interest will be, what the points will be and how much of a down payment will be required.

60+ percent of your credit score is determined by your payment history (late payments, collections etc) and amount of credit you have open at the time of the loan. The rest of the score is determined from how long you’ve had credit and/or good credit, open credit accounts (accounts you’ve applied for and been declined or accepted, regardless if you’ve opened them in the long run or not) and the types of credit you have. Those three things account for 35% total of your score.

Other factors that lenders consider are how long you’ve been in your current job and home. Those factors really only minimally affect the amount and interest rate, but can still help you get the best deal.
Credit scores are called your FICO score. The score is calculated by the information from the three biggest credit reporting bureaus; Experian, TransUnion and Equifax. The scores range from 300(terrible) to 850(max perfect). One thing to count on is any score below 550 will almost always get denied any kind of credit.
To really get a grasp on how bad credit lending practices are terrible for consumers, it’s important to see the difference in costs. The following figures don’t include the closing costs, points and down payment requirements, all of which are much higher with bad credit mortgage loans!

We’ll take a look at a bunch of different credit scores and how the interest and monthly payments are affected. Keeping in mind 850 being the highest and best credit and 500 being the lowest possible that any lender I’ve heard of, lends money. The following table is based on a 30 year fixed rate mortgage.

Amount of Loan FICO SCORE Interest Rate Payment Monthly Interest paid
$150,000 700+ 6% $899.33 $173,754.89
620+ 7.5% 1,048.82 $227,577.41
500+ 13% $1,659.30 $447,345.00

While those numbers aren’t exact, they give you a good representation on why it’s a better idea to repair bad credit than go with a bad credit mortgage lender.

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