You've heard the mortgage lenders barking their bad credit, no credit loans on television and radio. "Even if you have been turned down by another lender, you will be accepted by XYZ mortgage no matter what kind of credit history you have or what crime you've committed. We refuse no one because everyone is human, subject to bad breaks once and awhile. Why should you be penalized for circumstances beyond your control." Their pitch sounds too good to be true, and oftentimes it is.

Bad credit, no credit loan programs are primarily aimed at people with bad or no credit history. In exchange for the added risk a lender assumes on the loan, the borrower usually pays a sub-prime, higher interest rate. Common sense should remind the borrower with bad credit that applying for future credit gets harder, not easier. Repairing ones credit history should be paramount to re-entering the conventional credit and mortgage loan market.

Most people with a bad or no credit history should be fortunate that such loan programs exist. But they should also realize that such loans usually carry high interest rates and/or points. (A point is one percent of $200,000 or $2,000.)

A typical profile of a bad credit risk would be the following:

• DTI (debt to income ratio) of 50% or higher
• FICO (credit history) score of 620 or lower
• Low LTV (loan to value ratio)
• Little to no discretionary income
• Bankruptcy within past 60 months
• Two or more 30-day delinquencies over the past 12 months
• One 60-day delinquency over the past 24 months
• Foreclosure over the past 24 months

Some mortgage lender spokesmen claim that current rates for bad credit risks are the same as good credit risks and that times have changed for the credit compromised borrower. But it's not as easy as they claim. Borrowers should be aware of the differences between ethical and less than ethical lenders. Some unethical lenders use predatory practices that corner the borrower and saddle him with excessive rates or points.

The borrower has recourse against less than scrupulous lenders. The Home Ownership and Equity Protection Act of 1994 protects the borrower from lender malpractice. This act provides legal protection for the borrower in case the lender is found to have used deception and misrepresentation in the act of selling a loan. The Truth in Lending Act (TILA) sets new rules and regulations against lenders attaching excessive high rates and fees to certain types of loans.

It seems that more of these bad credit, no credit loan programs are populating the airwaves with claims of instant mortgages for borrowers. But just as the lender should beware of exposure to bad credit risks, the borrower should also beware of lenders with usurious or excessive rates tied to high-risk loans.

Rate this Answer: