Bad credit ratings were once recognized by mortgage providers as a black mark against an applicant, but the stigma no longer applies. The recent economic difficulties have caused the credit scores of even honest borrowers to fall. As a result, it is easier to get a home loan with bad credit than many people think.
Lending to an applicant with a poor credit history is a big risk in the eyes of lenders, but there are good reasons why securing mortgage approval is possible. Perhaps the most significant is that bad credit scores do not necessarily mean bad money management.
With the risk comes higher interest rates and tougher conditions and terms, all compromises that applicants must be willing to accept (within reason) if they wish to see their home loan application approved. But, there are some steps that can be taken to greatly improve the chances of application success.
1. Making a Large Down Payment
A down payment can make a big difference when seeking a home loan with bad credit. As a percentage of the purchase price, it effectively cuts the size of the mortgage needed to complete the purchase of the property. And the bigger the down payment, the smaller the mortgage required.
The benefits to the borrower are that, with a lower mortgage come smaller monthly repayments, and this makes the mortgage more manageable for bad credit borrowers. And with greater affordability, securing mortgage approval becomes much easier. So it puts the applicant in a strong position.
The challenge, however, is how to save a cash sum that is often anything from $15,000 to $50,000, depending on the value of the property. A 20% down payment on a home worth $150,000 means a mortgage of $120,000 is needed, while a 20% payment on a mortgage of $250,000 means the home loan falls to $200,000.
2. Submitting a Realistic Application
There is always the temptation to stretch ourselves a little too far, and often this is the only reason a mortgage application is rejected. When applying for a home loan with bad credit, it is important to be conservative in the amount of money requested. Lenders are more likely to approve a loan for too little, than too much.
Remember that approval does not depend on income, so even someone with an annual salary of $50,000 may not be able to afford to buy a $200,000 home. Securing mortgage approval comes down to proving an ability to make repayments comfortably.
So, while income is important, the debt-to-income ratio an applicant has is much more significant. Its 40:60 ratio means only 40% of income is allowed to be used to repay loans. But even with a large monthly income, too many existing debts pushes the rate too high, making approval on the home loan impossible.
3. Select the Lender Carefully
Finally, selecting the right lenders is important when applying for home loans with bad credit. This is because it is the lender who sets the terms, rates and conditions, and with the variety of each available, finding the right one can end up saving borrowers thousands of dollars.
Taking to the Internet is the best course of action, with comparison sites providing a fast method of narrowing down the offers to those that most suit your preferences. In any case, online lenders tend to charge lower interest than traditional mortgage providers, so securing mortgage approval is more likely online.
However, be sure about the reputation of unfamiliar lenders by checking them out on the Better Business Bureau website or Verify1st website. Once satisfied, submitting a realistic application for a home loan is a simple matter.