Bad Credit Mortgage Lenders in 2011 - An Update

By Brandon Cornett
© 2011 All rights reserved

We are still getting emails from people who want to know where they can find a bad credit mortgage lender in 2011. This is a lender that offer loans to borrowers with low credit score (i.e., scores below the 600s). I'll make this short and sweet. There aren't any of these lenders around anymore. They don't make subprime loans anymore, because they can't sell them into the secondary mortgage market. But that doesn't mean your powerless.

If you try to find a bad credit mortgage loan in 2011, you're going to end up frustrated. Sure, you'll find plenty of "credit repair" scammers making bold promises. But you won't find any reputable mortgage lenders willing to entertain a low score. What do I mean by low? I'm talking about FICO scores below 550. If you have a score in the upper 500s, you might find a lender to work with. But even then you'll probably be limited to the FHA loan program.

I'm telling you this to counteract all of the websites that are lying to consumers. I've seen countless bloggers and webmasters talking about their "strategies" for bad credit mortgage loans. I don't want you to be fooled by some unethical predator who just wants to charge you some up-front fees.

What is a Bad Credit Lender?

I'll explain why this type of lending practice is a bad idea. But first, let's go over some terminology related to this subject. A bad credit mortgage lender is any bank or financial institution that offers home loans to people with bad credit scores (i.e., scores that are far below the national average, and less than ideal for lenders).

You've probably heard the word "subprime" used in the past. That's what these lenders used to be called, before they all disappeared or restructured themselves. Subprime is the industry term for a borrower who is considered a high risk by the lender, as a result of the borrower's financial history, credit score, debt-to-income ratio and other factors.

Money magazine has a good definition of subprime lending:

"This is the sector of the [mortgage] market that is riskiest. Normally subprime refers to lending to individuals less likely to repay their loans. Good borrowers are referred to as prime."

The problem for people with bad credit is that this business model has become all but extinct. The level of risk associated with these loans makes them unsellable in the secondary mortgage market. They generally do not meet the guidelines established by Fannie Mae and Freddie Mac. Therefore, lenders are not willing to offer them anymore.

The Problem With Subprime Mortgages

If you happen to be one of those people with credit problems, you might think I'm against you in some way. That is not the case at all. In fact, I've offered some tips below for lifting yourself out of the "subprime" bracket entirely. But I am against any kind of financial practice that, when multiplied thousands of times over, causes economic turmoil for our country. And that's exactly what the bad credit mortgage lenders did during the 1990s - early 2000s.

When you approach a lender in this kind of situation, they will view you as a risk. Because whether you like it or not, that's what your credit history says about you — it says that, for one reason or another, you've had trouble handling your finances in the past. This is not my personal opinion, mind you. This is just the hard truth about how a lender will see you.

One of the fundamentals "laws" of the mortgage lending world is that borrowers who bring a higher amount of risk get charged a higher interest rate. Of course, the reverse is true as well. Borrowers with good credit (low risk) get rewarded with the best interest rates the lender can offer. Why? Because, statistically speaking, a person with bad credit is more likely to default on the mortgage loan down the road.

The Mortgage Landscape in 2011

As we know, a lot has happened to the economy since the subprime lending boom of the 1990s and early 2000s. Our economy was pushed to the brink of collapse and is still on shaky ground. And this is the problem with bad credit mortgage lenders — they were one of the primary catalysts that fueled our economic meltdown. They systematically made loans to people with a high likelihood of default. The credit-rating agencies then gave these bundles mortgages a strong rating, and the rest is history.

These loans usually came with very high interest rates. But the rates were often minimized during the first few years, in order to make them seem appealing / affordable to the borrower. Bad credit lenders favored the adjustable rate mortgage for this very reason. They could charge a low "teaser" rate up front, and defer the high interest payments until later on. We know the rest of this story ... record-breaking numbers of foreclosures, bad loans sold all over the word, a full-scale economic crisis, financial institutions failing, etc.

As a result of this financial mess we are in, there aren't many subprime lenders left these days. Some have collapsed, and others have been bought out by other banks and transformed.

So you might be asking, "Why are you spending so much time on bad credit mortgage lenders when they are practically extinct?" To which I would respond: "Because they'll be back."

If there's anything we know about the economy, it's the concept of cycles and history repeating itself. So the next time we have a housing boom in this country, there will be plenty of mortgage lenders going after the bad credit segment of home buyers. And in doing so, they'll be planting the seeds for our next housing crisis.

How to Lift Yourself Out of "Subprime"

In closing, I would like to offer some advice for people with bad credit scores who plan to buy a home in the near future. Start improving your credit, and start right away. As a result of the mortgage crisis we have experienced, it's going to be a lot harder to qualify for a mortgage loan in 2011 and beyond. And if Fannie Mae and Freddie Mac are eliminated, it will only get harder.

In fact, we are seeing this already. Home buyers are now required to have very good credit just to qualify for a mortgage loan. And if you want the lender to offer you their best interest rate on a home loan, you will need an even better credit score — probably upward of 740.

So if you are one of the many people in America with a bad credit score, start working on it now. You'll have a much easier time getting approved for a loan, and you'll get a better interest rate as well (and that means a small mortgage payment each month). To support you in this goal, we have created a library of credit advice.