Bad Credit Florida Home Loan Risks, and How to Avoid Them

You’ll find no shortage of online ads for Florida mortgages offering low introductory (or “teaser” rates), but down the road, those rates will most likely skyrocket, sometimes even tripling, meaning you could easily find yourself unable to meet the payments.

What’s worse, those Florida home loans usually carry some exorbitant prepayment penalties, leaving nowhere for people to turn and forcing them into foreclosure, maybe bankruptcy.

Some Florida mortgage brokers and lenders find creative ways of getting people into a home through these “subprime” loans, which usually are all that’s available to anyone with credit problems. If you have less than stellar credit, taking out a loan for anything - a car, furniture or a house - guarantees that you’ll pay a higher interest rate.

All subprime loans are risky, according to Ellen Schloemer, director of research at Center for Responsible Lending. But the more “exotic” the arrangement, the riskier it is.

Taking out a Florida mortgage in the “prime” market is much safer, not least because the lenders are tightly regulated. As much as 60 percent of subprime loans are issued by finance companies, which are governed by much looser regulations, putting borrowers at greater risk.

Although a prime mortgage looks more expensive at first glance than a bad credit Florida home loan, its interest rates will be significantly lower, saving borrowers thousands of dollars over the life of the loan.

The catch is that you need good credit to qualify - that means, according to experts, you probably need a credit score of 660 or higher.

The subprime market is heavily targeted toward minorities, but it’s not uncommon for minority applicants to incorrectly believe that their credit rating is worse than it really is. Possibly as much as 30 percent of subprime borrowers would qualify for better mortgage rates.

Part of the problem lies with brokers who steer applicants to bad credit home loans because they make the Florida mortgage broker more money. But consumers are also at fault for rushing into deals without taking the time to fully understand the transaction.

The Center for Responsible Lending recently released a report on the subprime market and its pitfalls. Consider one statistic:

Since 1998, 2.2 million subprime or bad credit loans have or will end in foreclosure. That translates into losses totaling $164 billion, and because they are so often taken out by low-income families, whole neighborhoods fall into decline as families are forced out.

Further, The Miami Herald reported in December that 3.3 million Florida mortgages were more than 30 days past due; late payments and foreclosures were rising faster among borrowers with ARMs.

So what should you do?

First, get copies of your credit reports and your credit score. Go over the reports carefully; if there are errors - and 25 percent of reports contain them - correct them. Don’t apply for any Florida mortgage loan until all incorrect, negative information has been removed, a process that may take several months (and might even require the help of a lawyer who specializes in consumer credit issues).

Getting this right could ultimately save you many thousands of dollars.

Finally, when you’re ready to take the Florida home loan plunge, compare and contrast at least a dozen offers. Don’t get sucked in by that unrealistically low, introductory interest rate - even in this buyer’s market, where you’re looking to jump on anything that looks good, and fast.