Bad Credit Home Loans

The United States has recently seen a financial collapse in the real estate market. It has its roots in the issuing of subprime mortgages, the majority of which were adjustable-rate mortgages.  In mid-2006, interest rates for these mortgages began to increase causing a drastic increase in delinquencies. As financial institutions and investors had to deal with an increasing number of defaulted home loans, their overall capital was affected, which paved the way for an economic recession.

Subprime mortgages are home loans offered at higher than average interest rates. These offer people with bad credit a chance to obtain a mortgage to buy their house.  They will generally have a credit score below 620 on a scale between 300 and 850. The fact that the borrowers have a deficient credit rating makes them a higher risk, which translates into higher interest rates on the home loan. This type of loan is relatively new, inspired by excess wealth and the desire to invest it in money-making ventures. Investors recognized that there was a market for loans to high-risk borrowers with imperfect credit histories.

There are a few different types of subprime mortgages, although the most common are adjustable rate mortgages (ARM). These are mortgages that initially have a fixed interest rate, but change to a variable rate based on a rate index, plus a margin. For instance, a 2/28 ARM will remain at a constant interest rate for two years, and then reset. Some borrowers took such a loan before the financial crisis, planning to improve their credit during the first two years, then reset it at a better interest rate. However, when the crisis occurred, it became difficult to get a reasonable rate.

In the 1990s, there was a dramatic increase in the number of subprime mortgages handed out in the United States. By 2006, approximately 20 percent of the mortgage market consisted of subprime loans. This created a risky market, as these borrowers are more likely to default on their payments. However, since there was an opportunity to make extra money through the higher interest rates, lenders were encouraged to take on the risk.  “Predatory lenders” also entered the market. These lenders preyed on inexperienced customers that were looking for a home loan.

In general practice, certain conditions must be met in order to qualify for a mortgage, but standards started to decline in the years before the crisis. Loan approvals were made without complete review of the required documentation. Mortgage fraud became more common, and the FBI warned that it could create significant credit risks. Traditionally, mortgage deals were created through banks, and these financial organizations retained the credit risk of lending money. This changed as banks began to sell the credit risk to investors using mortgage-backed securities. This meant that banks wanted to process as many loans as possible, and there was less incentive to check credit quality. Between 1996 and 2007, there was a three-fold increase in the number of these mortgage-backed securities.

By the fall of 2007, there were high market interest rates attached to the variable rate subprime mortgages. Many of the borrowers couldn’t afford the higher mortgage payments and they defaulted on their payments, went into foreclosure, or filed for bankruptcy. Suddenly, many homes were available for purchase and house values all over the country started to decline. The homeowners that were no longer able to make their mortgage payments found themselves in a bad real estate market, unable to sell their unaffordable homes. This also reduced profits for builders that were constructing many new houses.  As the situation worsened, investors started to take their money out of mortgage bonds. This created many problems for financial institutions, forcing lenders to close their businesses or merge with others. It produced a situation where banks had less money available for new loans.

The crisis that started with subprime loans in the real estate market ended up spreading to the economy as a whole, creating the worst recession in decades. Real estate makes up about ten percent of the U.S. economy. When the crisis hit, construction jobs became more scarce, increasing unemployment in that sector. When real estate sales declined, the value of houses also fell. As a result, homeowners were not able to take out as much money in home equity loans, reducing consumer spending. As consumer spending declined, there was further unemployment and the downward spiral continued.

By 2008, the U.S. government created a $168 billion economic stimulus package in an attempt to keep the country functioning for long enough to come out of the recession.  The Emergency Economic Stability Act was also passed, extending $700 billion to bailout some failing financial institutions. Despite government and private action to remedy the situation, it will still take some time to recover from the impact of this financial collapse.

It is the American dream to own your very own independent house. Many people have a desire to own their own home one day, but buying a house is not a onetime cost. There are numerous other expenses to consider before you jump into such an investment. If you start out with bad credit, it’s likely that your mortgage interest is higher than average to make up for the risk. Also, there’s a chance that your spending habits aren’t ideal, so before you sign on to that mortgage, consider the other costs of owning a home that could make it difficult for you to keep up with the expenses.

Before you even sign up to buy a house, there are various fees to consider. Some people will opt to get a home inspected to check for areas that need to be repaired, or look for signs of insect infestation such as termites that can cause structural problems. It is also useful to look at the electrical wiring in the house. If it is old, there’s a good chance that you will be handing over more money to upgrade it in the future. Similarly, you should have the plumbing inspected to see that everything is in working order and up to code. The heating system and water heater are yet another consideration; make sure they are working, or plan to replace them. Finally, look at the insulation; improper insulation results in higher heating bills.

There are also appraisal fees; a professional real estate agent will estimate the value of the property. The mortgage lender can use the appraisal to determine that amount of money to loan to the buyer. Once you’ve decided on a house, there are closing expenses. There are numerous little fees that can add up such as processing costs, underwriting fees and title insurance fees. These will often be around two to three percent of the mortgage loan.

Furnishing the home is the next large expense. In most cases, you will need to purchase some extra furniture with the new space available to you in a house. This is something that you can fund over time, but it can still be a large sum of money when you look at the total. This comprises not only larger items like beds and sofas, but also all the little things like towels and dishes. There’s also the matter of moving all your belonging into a new house. The cost varies, of course, depending on how far you’re moving and whether you’re hiring professional movers or using your friends.

Maintenance is another easily overlooked expense. This can take many shapes and forms. There are expenses found in repairing such things as a broken toilet or leaky sink. There are ongoing costs to replace little things like light bulbs. If you want to paint a room, or buy some plants for the garden, there are further expenses.  Then there are long-term projects such as remodeling a bathroom or kitchen, which can take a significant amount of money. Some of these expenses are not necessary, but others are an unavoidable part of homeownership. In the specific case of having bad credit, some of the larger costs of home ownership could pose a problem. If you don’t have enough money saved to fix a leaking roof, you have to rely on credit to take over, and pay it off over time. If you can’t get approved for such a loan, then regular maintenance can go unchecked and create more financial hassle down the road.

Utilities are yet another cost of owning your own home. The bills for electricity, heat, and water that you may take for granted need to be paid. Depending on the house, you could be paying hundreds of dollars a month on these bills alone. Once again, these costs will vary by location. It’s good idea to get an estimate of them before you decide to buy a house.

Property taxes are also a consideration. These depend on your location and the value of the property. Insurance is another hidden expense of owning a home, allowing you to protect your investment. Some mortgage lenders will demand particular types of insurance. Those who buy homes in areas that are known to be susceptible to flooding may have to purchase supplemental insurance as well. If the house is part of certain developments, there will be an additional “homeowners association” fee monthly. This is common within communities of condominiums, but can also apply to single-family homes. It typically covers such things as lawn mowing, snow removal, and maintenance of common areas. Even if you don’t ever plan to use the common areas, the dues must still be paid.

The bottom line is that owning a home can get very expensive, in ways that you may not consider at first glance. A basic cost of the house, as well as some of the larger maintenance projects can be expensive and hard to pay “out of pocket.” This is why those with bad credit need to really consider what they can afford to manage financially. Be sure to do your research and come up with the real cost of owning that house.