Bad credit does not mean loan applications are doomed. Even getting a mortgage loan with bad credit is still possible. There are some steps to take to improve the chances of success.
It is commonly believed that bad credit is the killer punch for loan applications, but they are not. Whether looking for a $2,000 personal loan or a $250,000 mortgage loan with bad credit, getting approval is not ruled out by a poor credit history.
As far as lenders are concerned, all that is needed to get approval is to make them feel confident repayments will be made without a hitch. To accomplish this, and secure mortgage approval despite having a credit history that is less than impressive, some simple steps can be taken.
In essence, with sufficient pre-planning and some careful preparation, getting the mortgage loan needed to buy your perfect home can be gotten. These are just a few of the measures that can help.
Knowing what is affordable is the first rule to applying for a mortgage loan with bad credit. For this, it is necessary to get your calculations right, taking into account the repayments of every existing loan, as well as bills and daily expenses, and calculating how much excess income is actually available.
Of course, income in an important element to any application too – more precisely, income versus the existing debt is important. What this means is that even with a very large monthly income, an applicant might see their application fail. If their existing monthly obligations are close to 40% of their income, then they are unlikely to secure mortgage approval.
The lending fraternity has a rule regarding the debt-to-income ratio, with a maximum 40% of income used to repay debts. The remaining 60% is free to deal with everyday expenses, bill payments and savings for a rainy day. To get the mortgage loan needed, repayments need to fit within the 40% share.
Better Debt Management
Generally speaking, bad credit ratings are a reflection the debt management skills of the applicant – though often, bad luck can be the principal culprit. What this means is that, when applying for mortgage loans with bad credit, lenders are greatly impressed when they see signs that these management skills have improved.
Taking control of existing debt can be accomplished in several ways. Perhaps the most effective is a consolidation loan, which can be used to clear all existing debt in one go. And since these debts, and their respective interest rates and terms, are replaced with one straightforward repayment involving just one interest rate, significant savings on outgoings are made.
This frees up extra cash, an instrumental factor when trying to secure mortgage approval. With monthly obligations reduced after such a proactive move, lenders can see that a mortgage loan would be in safe hands.
Reduce Required Mortgage
A third measure that can greatly enhance the chances of securing a mortgage loan with bad credit is to reduce the actual size of the mortgage required. The best way to do this is to increase the size of the down payment. This is typically set at about 5% of the purchase price, but if a sum worth 10% (or even 15%) can be saved, then the principal of the mortgage can be less.
Of course, this translates to tens of thousands of dollars off the sum owed, but also in a lower monthly repayment. This, in turn, makes the debt more affordable, which is invaluable when trying to secure mortgage approval.
Also, lenders are more impressed when a down payment of $20,000 is made, rather than $10,000, knowing the financial discipline required to gather that kind of money together. So, the mortgage loan is not only made more affordable, but more accessible too.