There is no doubt that applying for mortgage loans with bad credit means the best deals are out of reach. Mortgage providers and traditional lenders are usually very cautious over lending to bad credit borrowers, but some of them are open to accepting the risks involved – such as sub-prime lenders.
Over all, a sub-prime lender does not offer the most cost-effective mortgage options, but they do at least offer a very good chance of getting approval. And in the end, securing the funding to buy a new home is the point. What is more, they even offer 100% financing, or mortgage approval with no down payment.
Even for applicants with excellent credit records, there is a huge attraction to the idea of not having to make a down payment. Known as a zero-down mortgage, it effectively means no lump sum needs to be paid to seal the deal, savings tens of thousands of dollars in the short-term.
Zero-Down Mortgages: The options
Like everything else in the lending world, there is more than one option that those seeking a mortgage loan with bad credit should consider. In fact, there are 2 types of mortgages that require no down payment: a 100% financing loan, and an 80/20 financing loan.
The difference is evident from their titles. 100% financing means that the mortgage taken out covers everything in the purchase of the property. As a zero-down mortgage, this is the simplest to handle, but the interest rate charged (if high) applies to the full value of the home.
In contrast, the 80/20 means that the mortgage covers 80% of the purchase, while a second loan covers the remaining 20%. The applicant can get mortgage approval with no down payment, but effectively a second debt.
Terms To Consider
But what are the terms that make getting this kind of mortgage loan with bad credit a viable one? On the face of it, this option is very expensive, with sub-prime lenders charging above the average interest rates. Thus, the cost of the mortgage is very high.
However, the term of the mortgage is usually longer, thereby ensuring that the monthly payments are kept as low as possible. This means that even for a 100% mortgage, approval with no down payment is completely affordable.
Also, since with a zero-down mortgage the full amount of the purchase price is paid in one go, there is no need for any private mortgage insurance either. This helps to reduce the overall cost of the purchase too.
Qualifying For Zero-Down
The requirements to qualify for these mortgages can differ depending on the mortgage provider, but there are some consistent criteria. For example, those applying for mortgage loans with bad credit must have a score of around 600 to have a strong chance of approval.
Also, sub-prime lenders insist bankruptcies or foreclosures cannot be more recent than 12 month. This is in sharp contrast to other lenders, who are unwilling to grant mortgage approval with no down payment when bankruptcies are within 4 years of the application date.
Applicants should also be able to produce proof of at least 6 months worth of repayments in reserve, though some sub-prime lenders may ask to see 12 months in reserve before granting the zero-down mortgage.