Unfortunately, not every borrower is qualified to apply for a mortgage loan from a national bank. The banks and most lenders go through your financial history to check on how you have been paying off bills and debts to check whether you are a flight risk. If you have a bad history of paying debts late or even forfeiting payments, this reflects on your credit score and that means you have a low credit score. For this reason only, most banks and lenders will not consider your application for a traditional loan.
It does not mean that you cannot get a loan simply because you have a bad credit score. You have the option to approach private lenders to apply for a bad credit mortgage. Most people think that private mortgages usually require equity but this is neither true nor false. Private lenders sometimes require you to pledge collateral before signing off on a loan.
How does equity work?
When you choose to deal with private lending companies or individuals, they usually want at least 40 percent equity in the property. This means you get a 60 percent loan to the current market value of your property. However, this differs from different private lenders but the equity y depends on the amount borrowed and the type of collateral offered. At times they may need to check your financial statements before deciding on the equity percentage.
Collateral or Equity?
The reason most private lenders prefer equity is because they lend their investors’ savings in the hope to make a return on their investment. If you are not in a position to offer equity, the private lender can accept any other asset that you have that can act as collateral for your mortgage loan. They also check the amount you wish to borrow to check if agreeing on an equity percentage is a wise investment.
It works well with substantial amounts of money since the equity returns are also higher. If you are not familiar with mortgage loan terms, you can ask your lender to clarify them and explain what they really mean so that you don’t sign off on something that you do not understand.
A private mortgage is a loan
You should never forget that a private mortgage is a loan. Private lenders are given legal rights to take the necessary action when you default on your loan. You should take the same caution when applying as you would if it was any other normal lending company. Check to see that these private lenders are certified to operate as private lenders and check their integrity. These private investors are in business and they need to make returns on their investments so they end up charging higher interest rates on mortgage loans than national banks.
Set a repayment plan
You may have a bad credit score but it is never too late to amend it. Before applying for any loan, always ensure that you have a repayment plan set out and that you expect enough income to make the monthly payments. This way you avoid late payment charges.