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Home Loans With Bad Credit: Making It Easier To Secure Approval

With the series of banking crises that have struck since 2008, securing large loans with low credit scores has become a difficult undertaking. When the loan required is to buy a home, the sum involved is extremely high, so getting a home loan with bad credit can hardly be considered easy.

However, the good news is that there are ways to secure exactly that kind of loan, and to purchase your own home, even with the specter of bad credit hanging over your head. How can this be? Because there are always ways around hurdles, so getting mortgage approval despite poor credit scores is always a possibility.

It would be foolish to imagine that getting a home loan has ever been a simple thing. There are strict terms, and legal aspects that must be sorted out. What can be promised, however, is that with the right approach, approval is a lot easier to secure than some would think.

Negotiating The Bad Credit Issue

We are generally led to believe that having poor credit ratings is the surest way to kill off a loan application, and therefore the chances of getting a mortgage are practically nil. But this is actually a very misleading idea, and securing a home loan with bad credit is possible for a very simple reason.

Credit scores are not a significant factor in loan approval processes. Scores are seen by lenders as an evaluation of the past credit habits, but do not reflect the current financial position of an applicant. Getting mortgage approval despite poor credit scores is possible because even if in the past repayments were not affordable, they may be affordable now.

Basically, scores have an impact on the interest rate that is charged. When it comes to securing a home loan, this can be a vital element, with a high rate pushing the repayments up. But despite this influence, the real issues relate to the excess income available.

Improving Your Approval Chances

So, what are the steps to take to improve your chances of getting a home loan with bad credit? They are rooted in the areas of income and existing debt, both of which directly affect the affordability of the mortgage repayments.

For example, by lowering the amount of money already spent on meeting debts, it is possible to dedicate more to repaying the mortgage. This can be done in only one way - clearing some or all of the existing debts. Taking out a consolidation loan can clear these debts in one go, while the repayment terms of the new loan can see the monthly sum committed fall by as much as 50%.

With more cash to hand, getting mortgage approval despite poor credit scores is easier. Another way to improve approval chances are to pledge a larger down payment, which effectively lowers the size of the required home loan. With lower mortgage debt, repayments become lower too.

Consider An FHA Mortgage

While approaching mortgage providers is generally seen as the only option when seeking a home loan with bad credit, there is another option to consider - an FHA supported mortgage.

The FHA is not a lender, and so no mortgage is available from them. But they do offer a support program where 25% of the mortgage from an accredited mortgage provider is secured. This lowers the risk for the lender, thus lowering interest rates and removing the need for a down payment. So, getting mortgage approval despite poor credit scores becomes very straightforward.

However, it is necessary to qualify for an FHA mortgage, with applicants with scores of 560 and above eligible to apply. It means for those with terrible scores, the chances of a home loan are very slim indeed. Other conditions include having 3 forms of credit agreement and no defaults on record for 12 months.

There is always someone willing to lend anyone money. But you don't want to go to a loan shark to obtain a mortgage. It does not seem rationale that anyone would lend a person with bad credit money. After all, does not a bad credit score mean that I am at risk of defaulting?

Bad credit is not the only criteria used during the loan assessment process. If it were, mortgage applications could be approved or denied in a manner of minutes. Since they often take over 30 days, it is clear that the lender is looking closely at the application.

Lenders are in the business of lending. They are not in the business of rejecting applications. Traditional lenders are less apt to accept an application with bad credit but that is because they are limiting the number of new loans they are accepting. This means they are more critical about each loan. But other lenders are writing more loans and you can find lenders who will work with you on your bad credit mortgage application.

Will They Simply Ignore My Credit Score?

Credit scores are never completely ignored. But they are not really the sole reason that a mortgage application is denied. Credit scores indicate your history of credit use. It does not say anything about your current financial situation. This means that a poor credit score is not really as much of a risk as credit scoring agencies would have you believe.

Credit scores will affect the interest rate you will be charged. With mortgage interest rates sitting at historic lows, there is no reason to avoid seeking a mortgage simply because of a bad credit score. Lenders who are lending to people with bad credit know that the goal is to write a mortgage loan that will be repaid. This makes it good business to not charge an exorbitant interest rate simple because the credit rating of the applicant is poor.

Lenders Want Affordability

Affordability is ultimately based upon the money coming in and the money going out. If there is enough income and the right amount of debt payments, then a mortgage will be approved. This is tied into the debt-to-income ratio.

Today the general debt-to-ratio calculation states that forty percent of excess income must be available to make mortgage payments. If you have an extra $1000 in income left after your monthly expenses, you can only get a mortgage with payments of $400 or less. This calculation has nothing to do with credit scores at all.

How Do I Find a Lender?

When we think of mortgages we generally think about the traditional mortgage lenders. But these are the lenders that are limiting the number of new mortgages that are being written. You can, however, explore your area for subprime lenders.

Subprime lenders do require higher interest rates than do the traditional lenders. But they are also more likely to approve mortgage applications for people with less than perfect credit. Their expertise is in the area of lending to the people with bad credit.

The upside to applying with a subprime lender is that they will generally offer longer terms for the mortgage. A longer repayment period will lower the monthly repayment amount. This means that even with the higher interest rate, you can get an affordable mortgage.

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

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Mortgage Loans With Bad Credit

Owning your home is a dream almost everyone has, but it is not something that cannot be done on a whim - it requires money, and lots of it. The problem for the majority of home hunters is that having a poor credit history plays havoc with approval chances. But despite this, it is still possible to get mortgage loans with bad credit.

The best chance of getting the mortgage needed to buy the home desired is to prepare carefully for your application submission. It is never actually a matter of securing mortgage approval with bad credit, but in doing so with a convincing application.

Having a good credit score is an excellent advantage when applying for a mortgage loan, but it is not the core reason for approval. Nor is it the reason that an application may be rejected. So, even an applicant with a terrible credit history can secure the finances needed if their current financial situation is strong.

Here are some points that can help in guiding the way to approval.

1. Know Your Credit History

This might sound obvious, but knowing your credit history is something more than knowing your credit score. What needs to be ascertained when reading your credit report are the reasons for the low score. Getting a mortgage loan with bad credit can be tricky, but with the right areas identified, it is possible to more accurately strategize.

The biggest advantage, however, is in being able to spot any errors in the report and, therefore, the credit score. It is not unheard of for the reports to be missing recent information, such as a debt that was paid off or arrears that have been addressed. This can mean a significant score increase.

Ordering a review of your credit report can help in securing mortgage approval, since an improved score means improved terms (like lower interest). However, mortgage loan approval is not solely decided on by scores and credit histories.

2. Know What Is Affordable

A common mistake that home hunters make is to apply for a mortgage loan with bad credit when there is little or no chance that they can afford it. All too often, a dream home is out of our financial reach, but we try anyway. This is a bad idea.

The reason is that lenders quickly reject the application once they have calculated the sum is not affordable. This can reflect poorly when approaching another mortgage provider later and jeopardize the chances of securing mortgage approval at all. But more than anything else, it is a wasted opportunity.

Knowing what is affordable means working out how much your excess income is by taking your total monthly outgoings from your total monthly income. Then, using the debt-to-income ratio (40:60) estimating how high the monthly mortgage loan repayment can be.

3. Make Things Better

The third key step to take is to look at how your own application can be strengthened. For example, perhaps a larger down payment should be made, paying a 20% sum rather than the normal 10%. This will undoubtedly improve your chances of getting a mortgage loan with bad credit since it reduces the size of the required mortgage.

Another option is to seek a longer mortgage loan term, perhaps a 35-year mortgage rather than the more usual 25-year term. This means that the principal sum borrowed is divided into more monthly shares and, therefore, lowering the size of the monthly repayment. With less to pay, securing mortgage approval is easier.

Finally, be sure to be completely accurate with your information when submitting your mortgage loan application. Over the 60 days or so of the approval procedure, the mortgage providers will closely examine everything. Detailing your assets could build a positive image and help towards mortgage loan approval.

Admittedly, it can be difficult to see the logic behind lenders deciding to approve loans to bad credit borrowers. But when it comes to mortgages, surely the amount of money involved is enough to dictate against approval. In fact, getting mortgage loan with bad credit scores is a real possibility.

So, what makes it viable for an applicant to be given approval with a poor credit history? The answer is in the choices they make when filling in their application form.

Many lenders will point out that having a good credit history is important when seeking any loan. But, the lending world has changed, with mortgage providers largely having a more open attitude towards their applicants. A mortgage loan can be secured by a bad credit borrower, if the necessary criteria are met first.

Why Approval Is Possible

The key to any loan application is to show that the repayments can be made without any trouble for the duration of the loan term. Certain elements may dictate some conditions, and can be decisive one way or the other, but the essence remains the same. This is why getting a mortgage loan with bad credit can be considered a real possibility.

Bad credit applicants can often have simply fallen on hard times in the past. In recent years, many of us definitely have. Therefore, a credit score is not a true reflection on an ability to commit to a mortgage - other elements are. Consequently, approval with a poor credit history is possible.

These elements are relevant to the issue of affordability, and if a mortgage loan is affordable then the chances of future repayment difficulties are low. Stretching credit ability is the biggest problem for borrowers, and the debt-to-income ratio is designed to prevent that.

Easing Lender Fears

So, how can an applicant convince the mortgage lender that repaying the debt will not be a problem? Easing their fears is actually quite simple, and there are a number of moves to make in advance of submitting your application that can help in securing mortgage loans with bad credit.

Arguably the most important aspect of your application should be that it is a realistic one. There is no point in seeking a $500,000 mortgage if your income cannot support the repayments. But to assess what is realistic, applicants should know the reality of their credit position too. For that reason, reading your credit report is very useful.

Knowing where the weaknesses in your application lie helps in securing approval with a poor credit history because the right adjustments can be made, with the right parts of your financial position strengthened before actually applying for the mortgage loan.

Mortgage Terms and Structure

Establishing affordability is also dependent on the specific terms of the mortgage, like the interest rate structure and term. Getting the green light on a mortgage loan with bad credit is possible if these two areas are carefully chosen.

There are several interest structures available, mixing fixed and variable rates in an effort to ease the burden. For example, it is possible to get a 30-year mortgage that is divided into a 2-28 program or 3-27 program, where the first 2 or 3 years is paid at a fixed rate of interest. This helps the borrower to stick to a budget, reducing the risk of default and making approval with a poor credit history viable.

Finally, applying for a longer term means that the size of the monthly mortgage loan repayments is kept to a minimum. It does not mean that savings are made, since more interest will be paid over 40 years than 30, for example, but the pressure to meet those payments is less.