There was a time not too long ago when a person with a bad credit score could just apply at most any lender and get a home loan regardless of their credit history, as long as they had enough of a down payment. These days credit is much tighter and it looks like it is not going to be loosened up any time soon. The experts are predicting a tight money market and difficult lending for many years to come.
Too many banks and financial institutions making bad credit home loans are what led to the current economic downturn or recession (some would say depression). Many people that had bad credit and could not afford a home were given mortgages because they were encouraged to lie on their applications. Most lenders including Countrywide, Washington Mutual, World Savings, Fremont Savings, Indy Mac, and many others had mortgages available that did not require that the applicant borrower show proof of income. These are what are referred to as Stated income loans. With the wave of foreclosures hitting the economy now we all realize that what was being stated were lies.
Many people also got into what was the granddaddy of all bad credit home loans, the Negative Amortization loan or what was referred to as a Pay Option ARM (Adjustable Rate Mortgage). These Neg-Am loans were attractive for many reasons, primarily because they allowed people to pay a very small monthly payment on a huge mortgage balance that they could not have afforded had the loan been structured as an interest only loan and especially not as a fully amortized (principal and interest) loan.
These Pay Option Arms allowed the borrowers to pay one of three or four options each month. The first option was the highest payment and that was a fully amortized loan at the fully indexed rate. Since most of these loans had fully indexed rates of well over six percent, this payment was usually too high for most folks to pay. The second option was to pay just an interest only payment. This payment did not reduce the principal but it was considerably lower than the fully amortized payment. Then came the final option, the one most people could afford, the Deferred Interest payment. By choosing this option, people paid a deferred interest payment at a very low initial interest rate, usually one to two percent, sometimes slightly higher. The main problem with this payment option was that the deferred interest was tacked on to their principal balance, meaning that the bad credit home loan was not only not getting paid off, the balance was actually growing.
These bad credit home loans have led to wave after wave of foreclosures, bank sales and evictions. These days you have to have good credit and money in the bank in order to purchase a home.