Securing affordable terms when seeking a home loan mortgage with bad credit can seem unlikely, but there are ways to ensure the best possible terms are secured 3 ways in particular.
It is an obvious assumption that getting a home loan mortgage with bad credit cannot be a simple task. The size of a mortgage alone means that repayments will be significant each month, and low credit ratings suggest a difficulty in making existing loan repayments anyway. But the good news is that even bad credit borrowers can get a mortgage.
Of course, some extra effort is needed to get mortgage approval despite low credit scores. And it is the steps that are taken before submitting your application that can make all the difference. In fact, a lot more is considered by lenders than the size of an income and the credit history of the applicant.
The key word amongst mortgage providers is affordability, and it is proving that a home loan is affordable over the long term that matters most of all. Thankfully, there are some measures that can effectively enhance the affordability of the terms.
1. Improve Your Debt-To-Income Ratio
As with any other loan, the debt-to-income ratio is the principal influence on a loan application, so when it comes to getting a home loan mortgage with bad credit, the healthier it looks the better chance there is of getting approved.
The ratio measures the monthly debt repayments due against the monthly income, and sets a 40:60 ratio that lenders stick religiously to. It means no more than 40% of income can be committed to debt repayments, leaving 60% to cover general monthly expenses and any unexpected bills. Securing mortgage approval despite low credit scores is possible if the 40% limit is adhered to.
Of course, income is closely related to this ratio with large monthly paychecks greatly benefiting the applicant. However, a home loan is not granted solely on the size of the income. A 12-month employment contract, for example, may be high paying but provides no guarantee of employment after it ends.
2. Promise A Bigger Down Payment
There can be no underestimating just how influential the down payment can be in the approval process. After all, it has a direct effect on the size of the required mortgage, and this can in turn make the home loan mortgage with bad credit affordable or not.
Real estate agents will usually look for down payments of at least 5% to seal the deal, but some mortgage providers are willing to grant no more than 90% mortgages. This is fine, but by committing a payment of 15% or even 20%, mortgage approval despite low credit scores becomes a far more possible outcome.
The only problem is raising the money involved. If a house is worth $200,000, a 20% down payment translates to a single lump sum payment of $40,000. Many people secure down payment loans from independent lenders online before applying for the home loan.
3. Agree A Longer Mortgage Term
Of course, when affordability is the premier concern, it all comes down to how large the monthly mortgage repayments will be. If the sum involved can be kept down, then the deal is more affordable, and makes the chances of securing a home loan mortgage with bad credit extremely good.
The best way to lower the repayment sum is to increase the number of ways the principal borrowed is divided basically, lengthening the term of the mortgage. For example, a $200,000 mortgage repaid over 30 years will require repayments of over $600 per month, but over 40 years will cost $480.
That kind of savings can be significant and practically ensure mortgage approval despite low credit scores. But it is also important to note that with a longer term, more interest is paid over the lifetime of the home loan.