Home Mortgage With Bad Credit - Highly Unlikely

About once a week, I get an email from somebody who is trying to get a home mortgage loan with a bad credit score. They ask for advice on how they should proceed. I get this question so often, in fact, that I thought it was time to answer it here on the blog. That way, anyone else who is wondering how to get a home mortgage with bad credit can benefit from the response.

Here's my take on the matter:

In light of recent economic events, I can only think of one scenario where it makes sense to pursue a home loan with poor credit ... a life-or-death situation. Anything short of that, and it just doesn't make any financial sense. There are several reasons why advise against this, but let's stick with the two biggest reasons:

1. Bad Credit Mortgage Loans Are History

If you've been watching the news lately, you'll know that subprime loans are one of the primary factors that have wrecked our economy. These are home mortgage loans made to people with bad credit scores. From the mid 1990s until 2007, they were given out like candy. That's because the lenders who gave out these subprime loans could turn around and sell them on the secondary mortgage market. Obviously, this is no longer the case.

But when these subprime borrowers started going into foreclosure in record numbers, the government finally stepped up its regulation on this bad credit lending practice. Too little too late, I'm afraid. The damage was already done. The mortgage crisis became a full-scale economic crisis, the likes of which we have not seen since the Great Depression.

As a result of all this, it's virtually impossible to get a home mortgage with bad credit these days. And whether you care to hear it or not, this is actually a good thing. Point #2 explains why.

2. It's a Recipe for Disaster

Even if you could get a mortgage loan with a bad credit score -- which, as we have discussed, is nearly impossible -- it's not a smart thing to do. When you apply for a loan, the lender will examine all aspects of your finances (past and present) to determine what kind of risk you are. If you have bad credit, this sends up a red flag. It tells the mortgage lender that you have had trouble managing your finances in the past. In other words, they will see you as a higher risk.

When this is the case, one of two things will happen. They will either decline your application entirely, or they'll give you a home mortgage loan with a higher interest rate -- a higher rate than a person with good credit would have to pay. This translates into a higher mortgage payment each month, because interest is one of the things that make up that monthly payment.

If you're not careful, this is the kind of scenario that can lead to debt problems or possibly even a home foreclosure. We are seeing this exact scenario happen all across the country right now, with alarming frequency.

So my advice is to forget the idea of getting a home mortgage loan with bad credit and focus, instead, on rebuilding your credit score. If you do that, you'll have an easier time getting a loan, and you'll get a lower rate at the same time. A double win!