Bad Credit Mortgages - Are There Extra Fees For Mortgages For People With Bad Credit?

Our recent economic down-turn has caused instability in our job market. Many Americans have seen a reduction in income or in some cases a total loss of income. This often leads to late payments which ultimately shows up as bad credit. Bad things can happen to good people. If you've started to turn your finances and credit situation around and you are in the market to buy a home and get a new mortgage, you probably have questions about the fees associated with getting a mortgage with bad credit.

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Yes, if you go to a bank or mortgage broker with bad credit you will ultimately pay more for your mortgage than someone with good credit. This will show up in at least 3 areas.

Higher Closing Costs

Fewer banks and mortgage brokers are making bad credit loans than there were before 2007 and the decline in the housing market. Even when there were a far greater number of lenders making bad credit loans the closing costs and other fees associated with getting a new mortgage with bad credit were higher than mortgages for people with good credit. The smaller number of banks and mortgage brokers with loans for bad credit borrowers has not helped and fees for these types of loans are higher.

Some lenders that cater to bad credit mortgages charge an up-front fee to even begin working on getting you a loan.

Higher Interest Rates

The second place that you pay extra or have higher costs associated with a bad credit mortgage is in the interest rate on the loan that you get. In most publications the mortgage rates quoted are for the top credit borrowers. You can expect your interest rate to be significantly higher than those that are quoted. How much higher is determined often by the lender, the current market and your specific and unique situation so it is impossible to give you an exact, static difference.

Unfortunately, higher interest rates really means higher payments to you. Where higher closing costs that are added to the loan balance might add approximately $2,000 to the overall loan amount and increase your monthly payment by about $16 per month, the difference in monthly payment caused by interest rate can be far more substantial. For example, if the difference between a good credit interest rate on a $200,000 mortgage and bad credit interest rate is just a few percentage points, it could result in an increase in monthly payment of several hundred dollars per month. This is often one of the more devastating and often overlooked extra fees for getting a mortgage with bad credit.

More Restrictive Terms and Conditions

The last place that you pay extra for a bad credit mortgage is in the terms and conditions of the loan.

For example, it is not unusual for bad credit loans to have variable rate interest rates and/or introductory rates that go up after a period of time. I would strongly suggest that you consider looking at alternative, fixed rate loan programs because variable rate interest rates and low introductory rates have been a major contributing factor to many of our recent foreclosures and bankruptcies. Many families that were able to qualify for and afford the monthly payments at the introductory or low variable rate, but once the interest rate increased they were unable to afford the monthly payments.

Another term of bad credit loans that can cost you money is pre-payment penalties. If you must keep the loan for a specific period of time or pay a fee you might end up paying substantial fees if you decide to refinance the property to take advantage of your improving credit situation or improving rates and loan programs in the marketplace. Plus, if unexpected life changes come up and it would be in your best interest to sell your property to take advantage of a job transfer, change in relationship or marriage or a move to be closer to family you may have somewhat significant extra expenses in the form of pre-payment penalties on paying off your loan. Those expenses are in addition to the traditional expenses of selling a home and making a move. When you really add that into the cost of the loan, it can become substantial and these fees are usually not associated with good credit loans.

Conclusion

In conclusion, there are extra fees to be concerned with when getting a mortgage with bad credit. There are typically higher loan origination fees and closing costs. You typically have a higher interest rate which leads to probably the most devastating downside: significantly higher monthly payments. And finally, you typically have uglier terms and conditions to the loan itself. If you are considering buying a home with bad credit, there are other alternatives including 6 ways to buy a home creatively that do not rely on your credit score in the same way that getting a traditional mortgage does. Working with a quality local real estate agent that understands these types of creative transactions can help you better understand your options with your specific situation.

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