Securing mortgage loans with bad credit comes down to more than credit scores and income. Lenders look at a web of factors, making it possible for bad credit borrowers to get the green light.
When applying for loans with bad credit, a low credit score is not as debilitating as people think. The ability to secure mortgage loans with bad credit highlights that fact, with approval coming down to satisfying some simple criteria and clear-cut conditions.
There is a knack to building a convincing application for a mortgage loan when your credit rating is not so impressive. It comes down to some simple steps that are designed to address weaknesses, and requires some careful strategizing. But if done well, is effective enough to enhance the chances of approval.
So, what are the measures that can so positively affect the application? Well, below are a few tips applicants should take up if they are to improve their chances of securing mortgage approval with low credit scores.
Calculate What Is Affordable
It might seem obvious, but the first tip is to take care in your calculations when working out what mortgage is attainable. This is a wise move when seeking any loan, not just mortgage loans, with bad credit. After all, applications for loans that are too large are guaranteed to be rejected.
There are a number of aspects in your calculations that are critical. The first is income, and the second is the debt-to-income ratio, both of which have a very real influence over what is affordable. Applicants earning large incomes, say of $10,000 per month, may see their mortgage loan application fail because the amount of existing debt leaves insufficient excess income to cover repayments.
On the other hand, a low-income applicant may afford the same mortgage because their existing debt is extremely low. The debt-to-income ratio stipulates just 40% of available income can be used to cover debt, and once that is adhered to, approval with low credit scores is practically certain.
Improve Your Finances
Bad credit has a limited influence over the approval process, with a low score dictating that a high interest rate is charged. But many lenders are open to accepting the risk of granting mortgage loans with bad credit if the applicant has shown adequate signs of improving their financial position.
The reason is that lenders want to be able to trust the borrower, and their commitment to repaying the mortgage loan is evident in their preparation to secure it. Making an effort to take control of their finances is just the preparation they like to see. The most practical way to do this is to use a consolidation loan to clear all existing debts.
These debts are basically replaced by one loan, and as long as the new repayment sum is lower than the combined sum of original repayments, the move will be a success. With lower outgoings, and even a slightly improved credit score, mortgage approval with low credit scores is more likely.
Cut The Required Mortgage
Another tip to improving the chances of securing a mortgage loan with bad credit is to make a larger down payment. Normally, a payment of around 10% is expected, which reduces the required mortgage to 90% of the purchase price. But a larger down payment, of perhaps 20%, reduces the required mortgage loan to 80%.
The only problem with this plan is that it can be difficult to save 40% of the price of a home. A $200,000 home, for example, would require $40,000, which could take several years to save. Still, if it can be done, then reducing the mortgage to $160,000 helps greatly in securing an approval with low credit scores.
Remember too that $40,000 make a huge difference to affordability. A $200,000 mortgage loan might require $625 in monthly repayments over 30 years; but $160,000 needs $475 per month. The financial discipline required can be worth it.