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Getting Home Loans With Bad Credit: Tips to Increasing Your Approval Chances

There is little doubt that the better a credit history, the more likely a lender is to approve a mortgage application. The reason why is quite simple, with a proven record in meeting financial obligations suggesting the risk in lending to them is less. But does this mean applicants seeking home loans with bad credit are wasting their time?

Bad credit borrowers are not in as strong a situation when it comes to securing mortgage approval, but they have options. There are a growing number of lenders, especially online, that are willing to accept the risk, and while terms cannot be expected to be excellent, at least finances for a new home can be secured.

It may seem strange, but credit scores are not the most important factor in an application, with the more significant factors being job security, income and debt-to-income ratio. It is only when they feel confident about receiving home loan repayments that lenders will be willing to grant approval.

Here are 3 steps that can lead to stronger applications.

1. Understand Your Financial Strength

One of the biggest mistakes applicants make is to apply for financing without ever knowing their own financial position. Knowing your credit score, and how best to improve it, is a primary step to compiling a successful loan application, especially when seeking home loans with bad credit.

Get your hands on your credit report (available from the credit agencies) and read the details of your credit history. Reports are sometimes available for free from some lending institutions online, but these tend to give an overview rather than all of the details. Ordering directly from the agencies themselves means paying a fee.

But armed with the knowledge they contain, the chances of securing mortgage approval are increased. Remember too, the score provided may be wrong so get it reviewed. If corrected, then it can mean a lower interest is charged on the home loan.

2. Lower Debts and Include a Cosigner

Securing an affordable home loan with bad credit can be difficult, mainly due to the high interest rates charged. Typically, between 4% and 6% is charged, depending on the lender and the strength of the financial situation of the applicant. Bad credit scores tend to double those rates, making a huge difference in terms of affordability. But there are ways to lower the interest rate.

Including a cosigner usually sees the interest rate lowered to a normal level because the risk factor is all but removed. After all, a cosigner guarantees the repayments will be made on time, even when the borrower is unable to make them. Securing mortgage approval becomes more straightforward, though the cosigner must have an excellent credit history and a large enough income to make repayments if necessary.

Alternatively, lowering the level of existing debt is also effective. Taking the time to take out a consolidation loan to clear some (if not all) debts can drastically lower the monthly outgoings, freeing up extra funds to commit to the home loan repayments.

3. Consider A Pre-Approved Loan

Lastly, seeking a pre-approved home loan, with bad credit score or not, is good way to strengthen your position when it comes to negotiating prices with the property seller. Typically, approval takes between 60 days and 90 days, and the delay in awaiting approval results in the property being purchased by someone else.

By securing mortgage approval in advance, the borrower is able to buy the home they want immediately. It should be noted that a pre-approved home loan does not mean a lower interest rate is charged, but the speed in completing a home purchase can lead to discounts from the seller, thus saving on the overall costs.

Joycelyn Crawford is an expert in Easy Loans for Bad Credit and Easy Home Loans.


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Home Loan Mortgage With Bad Credit: An Affordable Route to Home Ownership

Bad credit ratings are supposed to play havoc with the chances of securing approval on a mortgage application, but it is possible to get a home loan mortgage with bad credit. Having a bad credit history is no longer the end of the world when seeking large loans. The right lender is always willing to take the risk.

The fact is that bad credit is not the indication of risk that it once was, with honest borrowers suffering in the economic crises of recent years. And with the growing influence of online lenders as known experts in lending to bad credit borrowers, getting approval with poor credit history is not likely to be too difficult anyway.

There are always compromises to be made, of course, but these can be affordable. Interest rates on a home loan are typically higher than those charged normally, but they are also almost always lower than those charged by traditional mortgage providers.

What Criteria Are Required?

Satisfying the basic criteria is essential first if there is to be any chance of getting a home loan mortgage with bad credit. Of course, the specific criteria themselves are no surprise at all, relating to age, citizenship and employment status. These are simple to prove.

Essentially, all loan applicants must be over the age of 18, while only US citizens and legal long-term residents are entitled to apply. Full-time employment, as well as an income sufficient to ensure repayments are made, are also essential. When these aspects are confirmed, then the task of seeking approval with poor credit history can begin.

That stage of the application process has its own set of issues, not least the debt-to-income ratio that the applicant has, which dictates the affordability of the home loan. The only way in which bad credit scores play a part is in the interest rate to be charged.

The Importance of Debt-to-Income Ratio

While credit scores can have a minor effect on the affordability of a loan, of far greater significance is the debt-to-income ratio the applicant has. Securing home loan mortgages with bad credit is dependent on proving repayments can be made comfortably, and the ratio establishes that as either fact or wishful thinking.

The ratio measures the income earned each month against the total monthly expenditure. Set at 40:60, it allows no more than 40% of income to be committed to repaying loans, so getting approval with poor credit history is heavily dependent on staying within that limit.

Lenders are very strict about the ratio, so if the home loan repayments cannot fit within the 40% limit, then they will reject the application. The size of an income is irrelevant if existing debt is too high, so clearing some of that debt with a small consolidation loan is the best way around that problem.

Use a Large Down Payment

A key part to any property deal is the down payment made, but its importance extends far beyond the role of just sealing the deal. It also reduces the size of the required mortgage, thus lowering the debt. Getting a home loan mortgage with bad credit is greatly helped by a providing a larger down payment.

For example, a 10% payment on a $200,000 property means a mortgage of $180,000 is needed, but a 20% down payments lowers the sum to $160,000, and approval with poor credit history is easier to secure on the smaller sum.

Remember too that with a lower principal borrowed comes a lower monthly repayment. And with every savings made, the better off the borrower is. After all, over 30 years, saving just $50 each month on home loan repayments means a total savings of $18,000 over the lifetime of the mortgage.

Hilary Bowman is a Financial Expert who specializes in Loans for People with No Credit and Bad Credit Loans.
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It would be untrue to suggest getting home loans with bad credit is easy. There are too many conditions connected with such large loans to allow that to be the case, even when the applicant has an excellent credit history. But what is also true is that approval even for bad credit borrowers is possible.

There was a time when a low credit score effectively ruined the chances of buying property. Lenders were too nervous to grant loans of perhaps $150,000 to such applicants, while the interest rate would be so high that repayments were expensive anyway. However, getting approval with low credit scores is not necessarily the chore it once was.

The reason is two-fold, with recent economic developments meaning even honest borrowers find themselves amongst the bad credit category, and with a growth in the options available to bad credit borrowers. So, a home loan can be secured (and at competitive terms) if the right lenders are approached.

What Does Bad Credit Really Mean?

On the surface, a bad credit borrower is cannot be trusted to repay their debts, but the term has become complicated with the developments in the global economy in recent years. Getting affordable home loans has become possible because the scores are no longer an accurate indication of risk.

The problem is that an economic recession leaves too many honest folk vulnerable, with tens of thousands of people losing their jobs, throwing their finances in turmoil. As a result, defaults grew and credit scores fell dramatically. Most lenders have responded by granting loan approval with low credit scores.

Of course, a low credit score means that the interest rate charged is going to be higher than usual. But if this factor does not make the home loan lose its affordability, then it can still be a good idea to accept the terms.

Pros and Cons of Bad Credit Terms

So, what are the advantages of taking out a loan that is expensive? Well, mostly it is because approval can be granted at all, allowing bad credit borrowers to actually get the home they want. Sometimes the end justifies the means, so the financial sacrifice involved in getting a home loan with bad credit is worth it.

Other advantages are the fact that to secure approval with low credit scores means the application needs to be strong, which suggests a far better financial situation. And once repayments begin on the mortgage, genuine equity becomes a reality, which only strengthens finances further.

However, on the negative side, high interest rates mean that repayments are high. This can cause a drain on precious little income, which can mean the threat of defaulting on the home loans is continual. Accurate budgeting is obviously important.

Buying a Home with Bad Credit

When seeking home loans with bad credit, it is worth noting that an affordable deal can be secured. This usually depends on paying a larger down payment, where the size of the actual mortgage is lower. However, getting the down payment together can take time and effort.

Securing approval with low credit scores is made a lot easier because the size of the debt is lowered. For example, when a home has a price tag of $200,000, a 10% down payment means a mortgage of $180,000 is needed to complete the transaction. A 20% payment lowers it to $160,000.

Another option is to seek a longer home loan term. So, instead of taking out $180,000 over 30 years, seek the same sum over a 40-year term. This lowers the repayments from around $550 per month to around $425. The extra cash can be used to cover other monthly expenses.

Sarah Dinkins is a financial advisor who writes about Guaranteed Unsecured Credit Cards and 100% Guaranteed Bad Credit Loans.