Mortgage Loans With Bad Credit: How No-Down-Payment Approval Can Affect Your Deal
The challenge of securing a mortgage loan with bad credit is significant. Not having to make a down payment can provide a boost, but in such cases, there are some extra factors to consider.
Most realtors look for 10% of the purchase price, which means sums of between $15,000 and $30,000 are needed. And with approval sometimes resting on making a larger down payment, the challenge is only compounded. The good news is that it is possible to secure mortgage approval with no down payment necessary.
But, there is no such thing as a free lunch, so anyone hoping to get a mortgage loan on these terms needs to be willing to accept some compromises. After all, the risk that the lender faces is higher, so they can only be expected to protect themselves any way they can.
How No Down Payment Mortgages Work
As great as it sounds, it must come as a surprise that a mortgage can be secured without having to make a down payment. But there are pros and cons to such deals. Securing a mortgage loan with bad credit is not easy, but the key advantage of not facing a down payment is that there is no need to save in advance of the deal.
A down payment is usually used as a kind of security, effectively sealing the purchase deal. But once the paperwork is signed, the deal is cast iron anyway. So, there is no actual need for a down payment. What is more, mortgage lenders do not consider the down payment when assessing an application. This means that approval with no down payment would be the case anyway.
Also, with no money diverted to a savings account to put together a lump sum of perhaps $25,000, that money can be used for purposes not related to the mortgage loan - for example, closing expenses, paying for minor repairs or buying new furniture.
Disadvantages Of Making No Down Payment
So, what is the negative side to not having to make a down payment? Well, the principal downside is that the size of the required mortgage is higher. And with the size of the debt larger, it can become more difficult to secure a mortgage loan with bad credit.
For example, if the value of a home is $250,000, making a 10% down payment reduces the mortgage to $225,000. But by securing approval with no down payment, the full $250,000 is borrowed. The result is higher monthly repayments (perhaps by as much as $250) and more interest paid over the lifetime of the mortgage.
Another negative to the mortgage loan is that the pressure to meet repayments is greater, and in line with the greater risk, the lender might choose to raise the interest rate. This is counter-productive, so it is important to ascertain what consequences there are to escaping the down payment.
Other Factors To Consider
When preparing to apply for a mortgage loan with bad credit, it is normal to look into the pros and cons of every attractive mortgage deal there is. This can take time, but the effort is definitely worth it. When looking for approval with no down payment, the key issue is not just interest rates and principal sums, but the affordability of the deal.
For example, look at agreeing a longer repayment term. A 40-year mortgage loan is going to have a lower monthly repayment sum than a 30-year mortgage, and the savings per month can translate to $250 extra in the hand to deal with other pressing debts.
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ABOUT THE AUTHOR
Joycelyn Crawford is the author of this article. For more information about Easy Loans for Bad Credit and Bad Credit Home Loans please visit her site http://www.easyloanforyou.com