There is no easy way of securing a home loan with bad credit, but there are wise ways. Putting together the right application provides the best chance of securing a green light.
There is nothing trivial about financing a home purchase. The amount of funding needed is huge and so the debt being taken on can be crippling. The right terms are needed, and the right mortgage provider too, but for those applying for a home loan with bad credit, neither can be considered enough.
The average size of a mortgage these days is around $180,000, which will take a considerable amount of commitment to clear over the 30-year term that most mortgages are available with. But for bad credit borrowers, the challenge is in securing mortgage approval with poor credit ratings.
Thankfully, there are ways to vastly increase the chance of getting the home loan. In fact, there are two key conditions that mortgage providers pay particular attention to: repayments are affordable, and the means to make the repayments are reliable.
Why Bad Credit Does Not Really Matter
The biggest trick that lenders have ever pulled is to convince the public that having a poor credit record drastically ruins their chances of buying a new home. In fact, getting a home loan with bad credit has always been possible just not preferable from the point of view of the lenders themselves.
Bad credit ratings are, after all, only an evaluation of the credit history of an applicant. It does not reflect the current ability or intention to make repayments, so they do little to confirm the degree of trust (or lack of trust) that comes with an applicant
Of course, securing mortgage approval with poor credit ratings is not as straightforward as it would be with an excellent credit history. And areas where scores have a definite influence is the interest rates charged, and the repayment structure that is established. This means that improving credit scores before applying for a home loan can improve approval chances too.
The Factors That Matter
It only makes sense that taking steps to address the factors that matter, and ensure they are in the best possible order, will enhance the chances of securing a home loan with bad credit. The fact that the potential debt can be $180,000 is beside the point if issues like loan affordability and repayment means are considered.
The issue of affordability is established by the debt-to-income ratio, which limits the amount of excess income that can be dedicated to repaying debts. The excess is calculated by taking the total monthly outgoings (bills etc) from the total monthly income, with the ratio stating no more than 40% of the resulting figure can be committed.
In order to secure mortgage approval with poor credit ratings, it is essential to satisfy this limitation. Of course, key to that is lowering the degree of existing debt, which would increase the amount of free excess income. In that way, the home loan is proven to be affordable.
Making The Repayments Affordable
So, when applying for a home loan with bad credit, how can repayments be made affordable? As mentioned above, the only way to do this is to lower the monthly outgoings, thus freeing up extra cash to make the repayments. And the only way to do this is to clear some of the existing debts.
The most viable way to accomplish this aim is to take out a consolidation loan and pay them off in one go. The value of this move is two-fold: firstly, the credit score is improved as debts are repaid in full; and secondly, the debt is replaced with a more manageable, more affordable loan agreement.
A third advantage also exists. When seeking mortgage approval with poor credit ratings any sign of attempts to improve finances are warmly welcomed by mortgage providers. It suggests the applicant is proactive and committed. Therefore, the home loan is in safe hands.