If you have bad credit, there are a number of reasons to stay away from home loans designed for people in your situation. News articles in recent months have been filled with foreclosures and other negative outcomes of dealing with predatory lenders.

These predatory lenders take advantage of your bad credit situation by charging you closing costs and points. If the lender is promising you attractive terms, they are probably not being honest with you. If you obtain a mortgage through them, you can easily get caught in a situation where you will risk losing your home. Ballooning interest rates make it difficult to keep up with payments, which is the predatory lender’s goal. They often structure your loan so that you would be forced to default, and then they can take your home through foreclosure.

Sub-prime lenders often offer no-money-down financing terms, which makes it easier for you to obtain the loan. However, with substantially higher interest rates, they make it harder for you to actually afford the payments. Another alternative is to offer an 80/20 loan, where you finance your mortgage with two loans, often at substantially different credit terms. Both of these options should be avoided, as they put you at higher risk of foreclosure.

If you find yourself with a bad credit rating but want to purchase a home, the best thing to do is to clean up your credit first. A conventional lender will require that any bankruptcies or foreclosures have been cleared for 2 to 4 years, while a sub-prime lender generally only requires one year. It’s better to wait the additional time, clean up any outstanding problems or inaccuracies on your credit reports, and then try to qualify for a conventional loan. This is far safer than gambling that you’ll be able to keep up with an interest rate that balloons in the future because of a bad product – home loans with bad credit.

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