A typical question that most buyers with less than stellar
credit ask is: How do I buy a house with bad credit? Now you may be wondering
what a sub prime mortgage is and how it may benefit you.
Quite simply a sub
prime mortgage is a loan provided to an individual that is regarded as a
high-risk borrower, due to their credit rating. Subprime borrowers who have a
credit score of less than 640 are not the norm, however this may vary depending
on the lender. Since it is the lender who is assuming this risk, the interest
rate for a home loan may also be higher. Some sub prime naysayers complain that
the interest on these loans is unfair. However keep in mind that in Texas how
to buy a house with bad credit, there are several types of subprime financing
available. In fact, using this kind of financing correctly could turn out to be
The most popular type of Texas subprime mortgage
in the state is known as an adjustable rate mortgage or ARM. An ARM begins by
having a low-cost interest rate that is locked-in for a specified period of
time, usually between 1 and 7 years. At the end of the term, the rate adjusts
to a higher rate. Adjustable rate mortgages have earned a bad reputation in the
mid-2000s for the role in the foreclosure bubble. That being said, it is
crucial for you to understand that most of those ARMs were supplied to buyers
with a bad credit report who simply overextended themselves. They simply bought
more home than they could afford. When the rate reset, they could no longer make
their monthly obligations.
Although the rate of ARMs does adjust with time, consider
refinancing to a lower fixed rate mortgage or another adjustable rate mortgage.
Taking advantages of the reduced interest charges of an ARM could save you
thousands on mortgage interest. The money you save in interest can be used to
pay off the balance of your loan and consequently allow you to pay
significantly less interest.
For many people, a traditional mortgage actually costs them
more money than the actual value of the purchase. It just doesn’t make sense.
Let’s be honest, most people do not live in a home for 30 years. In fact the
average time frame to live in a house 8 to 10 years. Even if the homeowners
decide to stay longer, the majority of people end up refinancing their mortgage
at least once. Some homeowners refinance as often as every 2-3 years.
In the long run, traditional mortgages end up costing the
buyer significantly more money upfront. This is because these ARMs require the
buyer to pay the majority of the loan during the first half of the term. The
traditional 30-year loan on the other hand, charges a higher mortgage rate as a
kind of insurance for the lender. Your loan provider assumes you will take 30
years to settle the debt. Thirty years is a long time and there is a chance
that something could happen that would cause you to default. The loan provider
charges you a higher interest rate to make more money in case of default. The
adjustable rates are only about 1 to 7 years so they can offer a lower interest
rate since the term is shorter and less risky for the lender. These ARMs have
lower interest rates than your traditional mortgage, and can save you significant
amounts of money. In retrospect, a traditional mortgage can cost you thousands
of dollars in premiums over the entire life of the loan. Subprime mortgages
should be considered by both prime and sub prime borrowers alike, simply for
it’s unique benefits. Below are a few situations when an adjustable rate
mortgage might actually make more sense than a traditional mortgage.
- When you have poor credit you want to restore. ARMs are
fantastic tools to help rebuild your credit. Refinancing before the rates
adjust during the course of the loan proves to be a good strategy to boost
credit and get you in a home faster.
- In case you plan to sell off your home before the rates
reset and rise. This works whenever you plan on living in the home for a short
while. Selling before the rates rise can help you avoid having to pay costly
- If you are planning
to improve the home to later sell it for a profit. In situations where you are
not planning for a long-term investment, an ARM can save you money while you
are remodeling a home.
- When you are expect to earn more money in the near future.
In this case, if the loan resets, the higher interest rates won’t matter because
they will be easier to pay off.
- If you are expecting
to receive an inheritance or lump sum of money. After receiving a windfall, it’s
usually easier to pay off any remaining balances of a mortgage. In this
situation the ARM serves as an instrument that will keep your monthly payments
low as you pay off the mortgage.
While there may be certain risks for adjustable rate
mortgages, these pitfalls are often minimized by intelligent investing and
A key strategy to remember whenever dealing with these types
of loans is to never overextend and to be honest with your budget. An ARM often
allows buyers to buy a home that’s greater than one they could afford. Bear in
mind that once these rates reset they can always be raised and can price you
out of your home, which may lead to foreclosure.
Speak with a loan specialist at Level 4 Funding to receive
the most up-to-date Texas sub prime mortgage programs
. Find out how to
buy a house with bad credit in Texas and what makes the most financial sense for you and
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