A bad credit home loan mortgage is a powerful lending tool for increasing your credit score. (Unnamed Copywriting)

A bad credit home loan mortgage is a powerful lending tool for increasing your credit score.

A lot of people find themselves trapped in the terrible cycle of bad credit. Because of their lower credit score, it becomes impossible to get approved for financing that has even decent terms and rates. Because of this, the only loans that are available to them carry monthly payments that are so high that it becomes increasingly difficult to properly manage these payments and their credit scores continue to drop.

But, in today’s lending world, there has been a shift in the way that a bad credit home mortgage loan works. Unlike the past, a mortgage now isn’t underwritten solely on the credit score of the borrower. The best available program for home mortgage refinance is the FHA program. This program does not take into account a borrower’s credit score, but instead factors in a borrower’s credit history.

These two things may sound like the same thing, but there is a crucial difference. Credit history, as defined by the FHA program is determined by a borrower’s last twelve month’s worth of payment histories. So, things like old collections and late payments form old loans are not taken into account.

An even more powerful change in the FHA lending guidelines from the lending guidelines of the old sub-prime and non-conforming lenders is the difference in mortgage rates. It used to be that a mortgage had its rate chosen based simply on the credit score of the borrower. The score itself was plugged into a matrix with scores and percentages being borrowed, and wherever the individual borrower landed on the matrix determined what their interest rate would be.

With the FHA program, the interest rate is the same for most borrowers, good credit or bad. The burden is not on finding a good rate, but on actually convincing an underwriter that you are a good credit risk. If this can be done, a borrower will likely be approved for a thirty year fixed rate that is very competitive. \

Because of this, FHA loans are a very useful tool to lower the interest rates on all of a bad credit borrower’s credit report. The FHA program allows a borrower to consolidate their debt for a total loan amount of up to 85 percent of their home’s value. This is incredibly useful for helping someone get out of the cycle of bad credit.

When a borrower starts looking at consolidating all of their credit cards within their new mortgage, overall monthly payments decrease dramatically. Most of the debt that a bad credit borrower is carrying will be things like high risk credit cards and installment loans. These loans are notorious for having incredibly high interest rates. Taking ten to twenty thousand dollars worth of debt that carries interest rates above fifteen percent and consolidating it into a mortgage that carries an interest rate around six percent makes it possible for homeowners to save hundreds and hundreds of dollars off of their overall monthly debt.

Through proper use, and FHA debt consolidation loan is not just a way for bad credit borrowers to get approved for a mortgage. It is also a way for them to improve their credit score and make other types of financing available.