Securing a mortgage loan with bad credit is not the problem many people think. In fact, with the criteria met and the right options chosen, bad credit borrowers have every reason to feel optimistic.
The issue of bad credit scores has become an extremely common problem in recent years, mainly because of the negative impact that the economic crises of the last 5 years have had. But even when it comes to applying for a mortgage loan with bad credit, there is plenty to feel optimistic about.
Why do so many people have low credit scores? Well, it has a lot to do with lost earnings and redundancies that many Americans have suffered. The disruption to income levels has caused chaos with debt repayments, and whether loans are defaulted upon or payments missed, credit scores have plummeted.
Getting approval with low credit scores should be next to impossible, not least because of the size of the debt in question. But the fact remains that there are lenders willing to grant mortgage loans to bad credit borrowers. How is this possible? Well, there are several reasons why.
The Truth About Credit Scores
For many people, low credit scores are something to fear but this is not actually a fair interpretation of their significance. If the truth be known, the credit score (or rating) that an individual loan applicant has is far less influential than we think. So, even getting a large mortgage loan with bad credit is possible.
A credit score is only a valuation of the past credit habits of an applicant, but provides no insight into the current financial state the applicant might be in. For example, someone with an excellent score may only recently have lost their job. So, despite their rating, they have no ability to make repayments. With the significance lessened, getting approval with low credit scores is not plausible.
A score actually only influences the interest rates that are charged, and in the case of a mortgage loan, the structure that a composite interest agreement takes for example, how many years are fixed rate and how many variable. In this way, the scores do impact on affordability.
Improving Your Approval Chances
Even with low credit scores, there are ways to greatly improve the chances of approval. One of the most common is to make a larger down payment, ensuring that the size of the required loan is smaller. When seeking a mortgage loan with bad credit, this can be helpful since the overall debt it less.
However, another key move is to seek a longer mortgage term. This means that the debt is spread over a greater number of months, so in each month a smaller share of the principal is repaid. For example, a $200,000 mortgage repaid over 30 years (360 months) would see $555 of the principal repaid each month; but over 40 years (480 months) the figure is $416.
When seeking approval with low credits scores, establishing affordability is important. Keeping the monthly repayments as low as possible is best way to accomplish this. So, seeking a mortgage loan term that is longer is an effective tactic.
Selecting a Workable Interest Rate Structure
Unlike many loans, mortgages have a very complex interest rate structure that can confuse the majority of us. There is usually a mixture of fixed and variable (adjustable) interest rates over specific terms that together can make repayments affordable even for applicants seeking a mortgage loan with bad credit.
When approaching a lender, it is important to work out what the best interest rate structure is to suit your budget and financial situation. A common option is a 3-27 mortgage loan, where the first three years of a 30-year mortgage has fixed rate interest, with the remainder having a variable rate.
It may also be viable to get a 20/80 mortgage, where 20% of the overall sum borrowed is a loan structure, with the remaining 80% the actual mortgage. Approval with low credit scores is possible because the structure ensures that the full amount is repaid in a manageable way.