Adverse Credit Mortgages

An adverse credit mortgage, also known as a sub-prime or non-conforming mortgage is a loan secured by your home or other property. This type of loan is often made in circumstances where there have been credit problems in the past, and/or you have no regular income that can be verified. The terms of such a loan may vary considerably, so be sure you get all the facts from any prospective lender before committing to the contract.

With an adverse credit mortgage, there are several factors to consider before going ahead with a new loan. Find out whether your existing mortgage carries an early repayment charge (ERC). With many mortgages and other loans, the penalty for paying off the loan before the scheduled date can be steep. In some cases the lender will charge several months worth of interest or a percentage of the balance at the time of repayment.

Of course the interest rate is a crucial factor in making your decision, and these rates vary not only from one lender to another but are tied to such factors as the condition of your past credit ratings, your current and future capability of repaying the loan, the fluctuating interest rates on the ‘open market’, and in the case of homeowners, the loan to value ratio of the loan amount to the assessed value of your home.

As has been shown only too clearly over the past few years, ‘prime’ interest rates can change drastically in a relatively short period of time. Variable interest rate loans are much more common and generally cheaper initially than fixed rate loans. However, you must remember than while interest rates may go down, they may (and more likely will) go up, at least in the current economy.

When considering a variable rate loan be sure that you know the exact terms of your contract. How much can the rate change and at what intervals? Will your rate actually be lowered if rates drop, or does the loan have a minimum and/or a maximum rate to which it can go, and if so, what is it? If the rate changes, will the payment change at that time or is the payment amount recalculated only once a year?

Interest rates are based not only on the base rate charged by the Bank of England or LIBOR (the London Inter Bank Offer Rate, which is the going rate at which banks loan money to each other). The rate of interest you are charged is also tied to the risk factor.
Lenders make predictions and assumptions based on your past history, for one thing.
A couple of late payments on your record will not usually be held against you, but any long-term default or continuing late payments will invariably raise the rate they offer you.

Any mortgage lender requires you to carry insurance on the buildings or home used as security, in case of damage or destruction. The requirements vary, and you should know what is required by your contract and decide how comprehensive your coverage should be, you might want contents insurance for your belongings as well as structural damage coverage.

Some lenders also require specific mortgage insurance, in case of default due to unavoidable events such as loss of a job, illness or death. This insurance may be structured to keep up the monthly payments or to pay off the loan entirely. In many cases the lender will absorb part of the cost of this insurance, but the benefit is for the lender only if you default on the loan.

All these elements are important when considering any mortgage, but with an Adverse Credit Mortgage it is essential to have all the facts as the payments, interest rates and penalties are all liable to be higher and more rigidly enforced.

Another deciding factor when you’re ‘shopping’ for a loan is the amount of lender’s fees that will be charged, and how they are to be paid. Sometimes these fees are paid up front from the loan amount itself; others are included in the payments, in which case you will end up paying more.

You may have to pay lender’s fees plus a fee to the broker who arranges the mortgage. Be sure to get a KFI (or Keyfacts illustration), which is a standard form from the FSA that will help you make comparisons in the fees charged by different lenders and brokers. Also, be aware that as with any mortgage, including the adverse credit mortgage, your property can still be repossessed if the payments are not met, so don’t try to ‘fake’ more income or assets than you really have in order to get a larger or cheaper loan. Lenders do not take kindly to being misled.