Circumstances happen. Sometimes they are caused by things beyond your control and sometimes they are a result of bad decisions you have learned from, and no longer repeat. Regardless of how you found yourself to have a bad credit history you can still get a mortgage and own your own home. Your options are not the same as those who are fortunate enough to have a clean credit report, but it is important to remember that you still have options! Your credit history bears a great deal on your ability to borrow money from financial institutions and other lenders. Whenever you take out a loan or credit card it gets reported to one of the credit bureaus such as Equifax or Trans Union. The lender reports the details of how much you borrowed, what your balance was from month to month and whether or not any of your payments were late or missed. If you don’t repay the loan and it goes to a collection agency that gets reported too. In fact, other problems such as unpaid traffic tickets and unpaid cell phone accounts will get reported as well. When you apply for a loan, mortgage or credit card the lender checks your credit history with these agencies. While your past behavior is not a guarantee of how you will repay the new loan, it is the best the lender has to go on when deciding what kind of risk you are.

There are two types of lenders: the mainstream lenders and the sub-prime lenders. The mainstream lenders are your traditional banks, credit-unions and other financial institutions who cater their business to low-risk clients with good income and strong credit histories. These lenders will most often decline your mortgage application if your credit score simply falls below the minimum standard they have predetermined. But that’s OK. There is a fiercely competitive and well developed market of sub-prime lenders. These are lenders who have built their business model around providing financing to individuals who represent a higher credit risk due to a bad credit rating. What is interesting is that, while there are some independent sub-prime lenders, more and more mainstream financial institutions are creating their own subsidiaries under unrelated names to tap into and take advantage of this very lucrative market. You see, lenders do want your business.

The main difference between the products offered by mainstream lenders and sub-prime lenders comes down to price. There is a greater risk of default in sub-prime lending and those institutions charge higher rates to be compensated for taking on that additional risk. This is not to say that the rates charged are unreasonable, just that they are higher than what is offered by the mainstream institutions. Even when shopping in the sub-prime mortgage market, it is just as important (if not more) to follow the advice I provided in Save Money; Get the Lowest Mortgage Rate Possible. Remember, a mortgage is a product just like an appliance or a sofa. There are many lenders who are competing for your business, so you want to ensure you are using that to your full advantage.

Because these loans carry a higher rate it is important to carefully consider the terms being offered. Whenever possible you want to lock-in a term for no longer than 18 to 24 months. After this period you want the option to renegotiate or pay out the mortgage in full with no penalties. The idea is that you will have made regular, on-time payments during this time and will have a good chance of qualifying for a regular low-rate mortgage. The higher rate you paid to the sub-prime lender at the beginning will have been well worth it to have been able to turn around and repair your previous poor credit rating. Additionally, when buying a home you have acquired a valuable asset. By making payments and with the value of real estate appreciate over time you will still be further ahead than if you had opted to rent a home instead. In that case your monthly payments simply go towards creating wealth for someone else.

To save time and money I recommend you seek out a mortgage broker. They will collect your personal and financial information and shop it around to several lenders. This will save you applying to each one individually. Try to work with a broker who comes personally recommended from a trusted source such as a friend or family member. Alternatively the Internet is a great resource to compare many lending options without spending a lot of time making appointments and traveling.

The sub-prime mortgage industry, and in fact the sub-prime lending industry in general, provide a much needed service. Individuals can find themselves not qualifying for regular rate lending for a myriad of legitimate reasons. Temporary unemployment, illness and marital breakdown are all examples of extrenuating circumstances that can cause you to fall behind or default on your payments. And you know what? Sometimes people are just young and foolish. Sub-prime lending gives you a second chance to purchase such necessities as a home to live in or a car in which to travel to work. By taking advantage of these opportunities and making every effort to repay these loans as agreed you will have taken incredible steps toward both making yourself financially better off and positioning yourself for securing better credit terms in the future.

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