Loans for People with Poor Credit are Hard to Find
It was not all that long ago that if you had a pulse you could get a loan from just about any lender in the country to buy a property. You did not need good credit and could even state your income, or as most lay people refer to it, lying. Because of the many millions of homeowners who have had their homes foreclosed upon due to these bad loans to bad risk borrowers, banks have swung the pendulum all the way back to the point where no one except the most qualified, high credit score borrowers can even dream of getting a loan. After the bailout of Wall Street, credit requirements by all the major lenders have become much more stringent. One of the main roadblocks for most borrowers when it comes to getting loans for people with poor credit is that sub-prime lending has all but disappeared from the lending industry.
Once upon a time companies like Countrywide Home Loans and DiTech made gigantic fortunes selling unsustainable and unrealistic home loans to people with poor credit and low incomes. Since properties were appreciating at such a rapid rate, and expected to do so for a long time (if not forever), it did not seem like much of a risk for the deregulated banking industry to just toss all lending requirements for underwriting out the window and basically encourage people to purchase properties that were way, way too much for their small or modest incomes. Most of these loans for people with poor credit were products like Pay Option ARMs (adjustable rate mortgages) or what are commonly referred to as Negative Amortization Loans.
These Pay Option ARMs allowed the borrower to pick their payment each month from a choice of three. The first choice was a fully amortized (principal and interest), 30 year loan payment. The second choice was an interest only payment, and the third choice was a deferred interest payment, usually at a low interest rate not to exceed 3% and as low as 1%. No wonder so many people went for it. With this kind of miniscule payment one could now seemingly afford to buy a mansion instead of a fixer upper dump, even if you worked as a gardener or busboy. Since you did not have to prove your income anyway, a lot of times you would see occupations such as Masseuse making over $10,000 a month. But as long as the banks kept approving them, people did not care.
Harsh and bitter reality bit us all on our collective backsides when the housing boom collapsed and suddenly millions of homeowners were in desperate trouble, and underwater on their mortgages. The term underwater refers to a homeowner who owes more on their mortgage than their house is now worth. This happened a lot to borrowers who signed up for loans for people with poor credit such as Pay Option ARMs.
Federal regulations are still too lax and bad lending practices could crop up once again.
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