Understanding Mortgage Types
When you are choosing any kind of mortgage, it is important to understand the different types that are on offer, as some may well be more suited to your needs than others. Mortgages are very personal things, so the mortgage product that works for a family member or friend may not work for you. When you are looking for a bad credit mortgage, you will find that your choices are narrowed down slightly, but it is still important to shop around as much as you can to make sure you get the best deal possible.
The most commonly offered mortgage prodcuts are detailed below, however this is purely a brief description of the the products and is by no means an exhaustive breakdown, and should not intended to be used as financial advice or guidance, rather for basic information and understanding of terminology used.
Variable Rate mortgages follow market rates and therefore you monthly repayments can go up or down, depending on market activity. These kinds of mortgages generally have lower interest rates that fixed rate mortgages as they can be unpredictable. Many people choose to have a variable rate mortgage as it means they are not committing to one lender as you would have to do with a fixed rate. They are also less likely to come with early redemption or over-payment penalties. The downside to this kind of mortgage is that if interest rates rise, so will your monthly repayment so they are not suited to those on a budget as you have no fixed monthly expenditure you can work from.
Fixed Rate Mortgages are popular as they are simple and easy to understand and budget with. This makes them the perfect first time buyers mortgage, as well as ideal for anyone who wants to have a set expenditure budget in place. While fixed rate mortgages aren’t the cheapest on the market, they offer peace of mind and security for the period you choose to fix it for, which for many people is important. The downside to fixed rates is that you have to commit to one lender for a set period of time, and there may well be penalties associated with early repayments, overpayments and in some cases moving house, so these are areas to be sure you are clear on when you are looking at the products on offer.
Tracker Mortgages are another form of variable rate, however they follow the European Central Bank base rate as it changes. Variable rate mortgage lenders can choose not to mirror any changes in the base rate should they wish. Tracker mortgages are set at a percentage above the European Central Bank’s base rate, and this percentage will stay in place for the duration of the mortgage, so unlike variable rate mortgages you will know what your rate is as soon as an interest rise or drop is announced. Tracker mortgages allow you to make monthly overpayments lump sum payments without incurring any penalties. As with variable rates, this kind of mortgage does not work well for those that want a set monthly payment that will not change.
Because you will be applying for an adverse credit mortgage, you may find that the rates being offered to you are not as good as those advertised on the high street, and it may even be the case that one or more of the above mortgage products is not available to you because of your circumstances. Choosing a bad credit mortgage is something that should be done with care, and you don’t want to lock yourself into a high interest rate for a long period of time, as your regular mortgage repayments will go a long way to building a good credit rating allowing you to avail of better rates a couple of years down the line.
Bad Credit Mortgage Case Studies
If you are looking for a mortgage but have a bad credit history, then you are going to have to take a slightly different approach to the borrowing process. While many mainstream mortgage brokers will not lend to anyone with a bad credit history, there are specialised brokers who deal specifically with bad credit mortgage applications who will be able to help you.
Finding out how you would be viewed by a potential lender is a good place to start when looking for this kind of adverse mortgage lending, so here are a few examples just to give you a rough idea. There are three basic levels of credit adversity that will be considered by lenders, of course the worse it is the fewer options you will have.
First off there is Light Adverse, a good example of which would be a young couple, both first time buyers who have saved a 5% deposit for their home. They need 4.2 times their income in order to obtain their mortgage however one of them had a default registered against them of around £1,000 in 2004 and had missed a couple of credit card payments over the last 12 months. Many high street Lenders would view this unfavourably, for instance Abbey National and C&G rejected their application, however First National were prepared to offer them their 95% LTV mortgage.
The next level is Medium Adverse, someone requiring a 90% LTV mortgage, however they have a CCJ and defaults of £3,000. Add to this two missed mortgage payments over the last year and one additional missed payment on a credit card in the last six months. Their current mortgage provider, C&G rejected their new mortgage application, however the same application was accepted by BM Solutions.
The final level is Heavy Adverse, and this is where you really have got in trouble with your credit and repayments. For instance, a self employed couple wanting to remortgage their home in order to pay off numerous unsecured credit amounts so they could have just one manageable repayement every month. They were in mortgage arrears already and had only recently been discharged from bankruptcy. It was possible for them to secure a remortgage through GMAC without having to provide evidence of income as they were self employed.
As you can see, even in what might seem the most dire financial circumstances it is possible to secure a mortgage, and while it may not be the best deal around at the time, when you are taking on a bad credit mortgage you already know that you are not going to get favourable terms.
As joblessness has increased in the US, there continues to be a significant increase in mortgage delinquency for the last quarter. Initially sub-prime mortgage holders are blamed as their bad credit mortgage introductory rate period has come to an end, but now prime credit mortgage holders are facing difficulty as unemployment grows. According to a LA Times report more than 13% of US mortgage holders are either behind with their mortgage repayments or are facing foreclosure. As more and more people with clean credit records face falling behind with their repayments the demand from people looking for a bad credit mortgage soars.
The problem however is not the demand but supply of lending from the banks. As more and more financial institutions are becoming unsound, others are hoarding their bailout money for the possible worse times ahead. The so called bailout is bailing out the banks but not the businesses and borrowers who really need it. On a more positive note, there jobless figures showed a decrease of .1% from June to July, nothing to get excited about but at least it’s a move in the right direction. The new administration’s housing affordability program is helping but people are complaining that their applications, extensive and detail paperwork, are getting lost in the system. Loan modifications are are slow to materialize and in the event that they do so, people are still going to have to pay up later rather than sooner.
The State of California looks particularly bad as unemployment beats the national average, but due to it’s diverse economy and notorious up and down housing market some expect it to lead the recovery. Some agents are seeing people step back into the housing market as prices seem to have hit bottom, and there appears to be a pick up in San Francisco and Orange County.
The glut off people with good credit means that in order for the economy to make progress it will be necessary or people with bad credit to be given mortgages. It’s the only way to get cash circulating and breathe life into the comatose property market. The banks have no right to look down on people with bad credit records when they themselves have blemishes on their record. Lets hope they don’t take a ‘holier than thou’ approach – if they do they could extend this recession even further, thus cutting off their nose to spite their faces. Perhaps President Obama will look out for the people on the ground and push banks to release their hoard of cash sooner rather than later, so maybe an increase in spending by Christmas may set the US on the road to economic recovery. It seems too far to rech to expect to see home flippers, the heart of the last housing bubble, returning any time soon unless people with bad credit can get a mortgage to purchase their handiwork.
