Most everyone wants to occupy their own home. For those with no credit or bad credit, getting a mortgage may seem impossible without resorting to bad credit home loans.
While these loans can initially look like a viable option for owning property and strengthening your financial position, they’re not the golden opportunities they may appear to be. There are a number of serious disadvantages to the bad credit new home loan. Here are three of the biggest.
High Interest Rates
Expect to pay high interest on any bad credit new home loan. Lenders customarily charge a minimum of 3-5 more interest percentage points for these loans than for standard mortgage loans.
The mortgages usually come with adjustable interest rates. That means your interest rates can and will fluctuate according to the prevailing prime rate. Interest rates on adjustable term mortgages can change up to six times over the course of one year, leaving you no way to predict how much interest you’ll be paying at any given time.
High Monthly Payments
Because of high interest rates , your monthly payments for a bad credit new home loan will also be high. When you factor in the adjustable interest rate, monthly payments can increase dramatically from month to month. Repaying the loan can easily become unmanageable, resulting in even worse credit and the possibility of foreclosure.
High Down Payments
The average down payment on a mortgage loan in the current market is between 10-20% of the purchase price of the home. But with a bad credit new home loan, you’ll be expected to fork over a down payment of as much as 40% of the purchase price. For no credit check home loans, you can expect to be required to offer an even bigger down payment.
This hefty down payment requirement is the lender’s hedge against your possible default on the loan. What it means for you is that, for a home valued at $200,000, you’ll need to produce an $80,000 down payment.
Rather than resort to a bad credit new home loan, a better strategy would be to maintain a reasonable rental address while you save for a down payment and beef up your credit score. In a matter of a few years, you can qualify for much better mortgage loan terms.