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The Points of Bad Credit Mortgage Loans

Mortgage companies are not often willing to finance individuals with bad credit or without any money for a down payment. However, there are some bad credit mortgage loans that help people with low credit scores, or low income obtain financing for a new home. The bad credit lenders help individuals get their loans approved faster than the programs offered by credit unions and banks. A bad credit mortgage loan will have a higher rate of interest as well as higher closing fees. These mortgage loans may also carry a prepayment penalty for the borrowers, and have six months to a two to three-year prepayment penalty. So, the borrower will have to pay a large sum of interest for at least six months before they pay off the loan.

Bad credit mortgage lending is also known as the sub-prime market, or b.c.d credit lending. Bad credit mortgage loans are not like the type of mortgage loans that are available to borrowers with good credit. The bad credit mortgage loans have higher interest rates and origination fees on the loans, but there are limits to the amounts of these fees, which are deemed as proper in the mortgage industry. Points are used to express the amounts that must be paid by borrowers, and these points represent a fee corresponding to 1 percent of the amount of the loan. Individuals with good credit may have no points, while individuals with bad credit may have four or five points. There are some bad credit mortgage loans that may charge some individuals as much as ten points. For example, a loan of $150,000 with ten points will charge the borrower $15,000, but this is often uncommon, and consumers should be wary of these loans with more than five points.

High points on a mortgage loan are a red flag that the lender may be trying to take advantage of the situation, and many consumers are best avoiding these situations. Finding a broker or lender that offers a bad credit mortgage loan may be difficult and requires some extra legwork, but persistence will bring up many sources for these types of loans, and lenders that don't have incredible origination fees. Points on a mortgage loan could cost individuals with bad credit thousands of dollars. These points may also be known by many names, including origination fees, discount fees, broker fees, or yield spread premium. There are two forms of points on bad credit mortgage loans, which are Upfront Points.

Upfront Points are paid to the lender or the broker as compensation for creating the loan transaction, and may represent the brokers' only source of income. Borrowers have the option of paying more points to "buy down" the rate of the loan. Back End Points are the second form of points that are offered on bad credit mortgage loans. Typically, lenders pay Back End Points to the mortgage broker, and these points may represent an addition incentive from the lender to the broker to make a certain loan. The back end points may also be used as payment from the lender to the broker as a reward for obtaining a loan with a higher interest rate. For instance, a borrower may only be able to obtain a loan with a 10 percent interest rate, but the broker may only offer an 11 percent interest rate to the borrower, in order to receive two extra back end points from the lender.


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