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Loans for the Credit Challenged

Many people do not fit in the traditional low risk borrower category. Borrowers who have credit history that is less than perfect, people who need a mortgage for more than the value of their home, and people who want to escape the really high interest rates that they are paying on credit card balances are known as "sub-prime" borrowers.

Some of the lenders risk is mitigated by the fact that the loan is secured by property. Recently lenders have come up with innovative ways to serve borrowers whose needs fall outside the box of traditional underwriting.

Risk based pricing: Today many lenders are willing to lend to sub-prime borrowers by using risk based pricing. They charge interest rates that are higher than what they offer their best customers but lower than what you'd pay if you didn't have perfect credit.

125% LTV mortgages. LTV = loan to value, or the ratio of the amount of the loan to the value of the property that secures the loan. If the LTV is 125%, this means the lender is willing to lend you more than the value of the property.

Home equity loans: Homeowners can take out a second mortgage. These loans are called home equity loans because the loan is backed by the equity in your home, which is the value of your home less the amount you owe on your existing mortgage.

Do's and don'ts for people who need one of these new loans:

Do try to clear up as many outstanding credit issues as you can that could cost you a higher interest rate.

Don't use a credit doctor. They charge very high fees and usually are counterproductive or even illegal.

Do compare rates from at least two lenders. The lender will need the application filled out and will need to run your credit and other data to determine the interest rate of charge.

Don't pay a large application fee to a broker who promises to handle your difficult case. The cost is usually about $200.00, but could be less. Paying more doesn't increase your chances of getting the loan. Lenders should be happy to take your application as their incentive is to make money on the loan.

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