Despite having bad credit history, getting a home loan mortgage with bad credit is not the impossibility people expect. The key to approval is having a strong application and meeting the set criteria.
Getting a home loan mortgage with bad credit is not the easiest thing in the world, but it is far from the impossibility many people are led to believe. A typical mortgage is around $145,000, so it would seem that having a poor credit history when seeking such a large loan would surely work against them.
But bad credit ratings are not death knells to loan applications – even big ones – and there is a growing number of online lenders willing to accept the risk of lending to applicants with bad credit. In fact, online lenders are recognized experts in lending to that niche market, so getting approval with poor credit history is more likely too.
Of course, applicants need to accept some compromises before they can hope to secure the deal. Not least is that fact that interest rates on a home loan are going to be much higher. But at least the chance to buy a home is there.
Criteria To Meet
As with all loans, the first thing an applicant has to do is meet the basic criteria before they can hope to get a home loan mortgage with bad credit. There is no secret surrounding these criteria, with age, resident status and proof of income the three areas that they relate to.
The law stipulates that applicants must be over 18 before they can be considered for a loan, but lenders insist only US citizens can receive a loan (or long-term residents). Applicants must also have a reliable source of income, and an income large enough to cover repayments comfortably. Only then can they qualify to get approval with poor credit history.
However, other issues like the debt-to-income ratio and the overall affordability of the home loan need to be examined also. Bad credit scores only influence how high the interest rate will be.
Significance of Debt-to-Income Ratio
Low credit scores influence the interest rate charged on any loan. A high score of 700 will mean a low interest rate is charged, but a poor score, like 500, will mean a high rate is charged. But the key factor to securing home loan mortgages with bad credit is the debt-to-income ratio that exists.
The debt-to-income ratio relates to the amount of income that is free to make repayments with. Lenders have set a ratio limit of 40:60, allowing a maximum 40% share of income to be used to repay loans. The idea of securing approval with poor credit history is based on the fact that even with terrible credit scores, the ratio can be met.
Rejection is certain if repayments from a new home loan pushes the ratio over 40%. In this case, even a large income cannot change their minds. A wise way around this problem is to lower the existing debt before applying for the mortgage. A small consolidation loan may be enough to lower the debt sufficiently.
Consider the Down Payment
Before applying for a home loan mortgage with bad credit, it is a good idea to have saved a significant down payment. The reason is that with a down payment, the size of the required mortgage is smaller. By offering a larger than usual down payment the mortgage becomes even more affordable.
It is no surprise that the smaller the required mortgage, the easier is it is to secure approval with poor credit history. With a lower principal to borrower, a lower interest rate may be charged and the size of the monthly repayments fall. Even a small saving can have great advantages, with $100 per month adding up to a total of $36,000 over a 30-year home loan.