People may use the term “bad debt mortgage” to refer to a mortgage for a borrower with poor credit history or a mortgage a borrower uses to refinance in the process of consolidating debt as part of a payoff plan. In both cases, it is a financial product for people who might have difficulty getting conventional loans because they are carrying a lot of debt or they are in default on debt. Several lenders have bad debt mortgage plans and people can often get a good rate by working with a broker.
In the case of someone trying to secure a mortgage to buy a home, a bad debt mortgage can be an option for people with low credit scores or other credit history problems. Normally, these would prevent a lender from extending credit. If the borrower is willing to make a larger down payment or pay more interest, the lender can be willing to negotiate. It will determine how much money it is willing to risk and offer a mortgage to the borrower with some restrictive terms to limit risk as much as possible.
A bad debt mortgage refinance for consolidation can allow people to pay off an existing mortgage with a high interest rate and other problems, and may provide some extra money to pay off credit cards and other debts. This is possible with a cash out refinance, where extra money is built into the loan at the time of origination and the borrower receives a credit. The terms of the loan may be favorable, creating an incentive to refinance to pay off older debts.
When looking for a bad debt mortgage, people should be aware that they will probably have to pay a high interest rate and they may need a large down payment. They should review any loan offers carefully for pitfalls to make sure the new loan doesn't create a new set of financial problems. Working with a broker can provide people with access to more loans, including products banks develop for brokers and do not offer to the general public. The broker can provide advice on the best loan product to choose and how to proceed with the loan application.
Once borrowers have a bad debt mortgage, they will need to be consistent about payments so they can improve their credit scores. It can take several months after the resolution of bad debt for the credit score to start to rise. Missing payments can result in a drop in the credit score, as well as interest rate increases and other penalties.