Credit history is based on information retrieved from sources including Public records such as electoral roll information, court judgments and bankruptcies; and Information provided by financial institutions and other lenders such as banks that provide credit accounts and lending facilities.

In order to calculate the potential risk in providing loans to the person, most lenders use independent credit reference agencies to gather and assemble this information since they are permitted by law to review a mortgagee's credit report before granting approval.

Bad credit rating usually results from failure to pay off outstanding debts or other credit payments on time, due to factors such as outstanding rent or mortgage arrears, county court judgments (CCJ) or bankruptcy. There are also other reasons that can result in a bad credit record which include:

1. Foreclosure

2. Heavy medical bills

3. Settlements arising due to Judgments /divorce

4. Multiple credit cards

5. IRS debt

Bad credit mortgage is designed for people who are unable to take out a mortgage from high-end mortgage providers. However, there are several providers who are willing to take a risk and provide loans for individuals with bad credit ratings, but at a higher rate or lower maximum amount.

Normally, a bad credit mortgage loan has an introductory interest rate that is fixed for 2-3 years, which is substantially higher that the rate pertaining to a conventional 30 year fixed rate loan. This is due to the extra risk the lender has to take, because with a bad credit, the borrower's probability of default on the home load is higher than someone with good credit. However, after the initial period, the interest rate on a bad credit mortgage will adjust periodically.

There are also a few factors that most lenders of bad credit loan mortgages will look into, before granting the loan mortgage to people with bad credit history. This includes:

1. Employment history and income stability

2. Current monthly debt

3. Value of the property and

4. Down payment

Since loan requests from people with bad credit do not fit under the standard underwriting guidelines, fees charged by lenders on bad credit mortgage loans are also significantly higher than those charged in a conventional or standard home loan. This can range from 1% to 6% of the total loan amount.

Since individuals who get a bad credit mortgage usually do so mainly because they want to put their credit back into good standing, or as an opportunity to clean up credit history, the higher interest rate need not necessarily lasts for 30 years. Additionally, if the monthly loan payments are in time for two consecutive years, the bad credit mortgage can be refinanced with a conventional loan at a much lower interest rate.