Taking on a mortgage is no trivial thing, with the debt created typically in the hundreds of thousands of dollars. For bad credit borrowers, the task of getting approved can be extra difficult, but it is worth noting that there are some mortgage providers willing to approve applicants seeking home loans with bad credit.
Of course, securing mortgage approval comes down to meeting the criteria that lenders lay down, and convincing them that monthly repayments will be made without a hitch. Happily, credit scores actually have very little to do with it, providing bad credit borrowers with a window of opportunity.
The factors relate to income and debt-to-income ratio, and so long as these matters are addressed satisfactorily, the mortgage provider is extremely likely to grant the home loan application. But what are the factors and conditions that applicants need to be aware of?
1. Bad Credit Is Not Important
The biggest mistake applicants make is to think that the credit rating they have is a hugely important factor in the approval process. It is not, and in fact only affects the interest rate that is charged. So, those seeking home loans with bad credit can feel confident of getting the funds they need.
The reality is that if the credit score is very low, the interest rate on the mortgage is going to be high. This means two things. Firstly, the credit score can affect the affordability of the deal, thus impact on the chances of securing mortgage approval.
Secondly, it means that improving your credit score can have a positive impact, lowering the interest rate and thus helping to make the home loan more affordable.
2. Securing Better Terms
Since, the scores are linked to existing debts, the best way to improve credit scores is to clear those debts. That way, the score rises and the chances of getting a home loan with bad credit are improved.
The best way to clear those debts is to take out a consolidation loan and pay them off. The original debt is replaced by a new loan, but the new terms should make it is more affordable. This can improve the debt-to-income ratio, which in turn greatly improves the likelihood of securing mortgage approval.
Alternatively, trying to clear individual debts bit by bit. This will take a much longer amount of time, and the impact is likely to be less. Remember, a down payment needs to be saved in advance of securing a home loan too.
3. Making the Mortgage More Affordable
The affordability of any loan is the crucial element in the approval process, with the debt-to-income ratio establishing whether it is or not. But since the monthly repayment sum is the key, lowering it can help make the deal affordable. When it comes to a home loan with bad credit, this may be the fastest way to making the mortgage affordable.
Accomplishing this is pretty simple. Just take out a mortgage on a longer term than usual. Extending the term from 30 years to 40 years, for example, can reduce the repayments each month by perhaps $200. And once affordability is confirmed, securing mortgage approval is a formality.
Bear in mind, however, that a home loan with a longer repayment period is going to be more expensive in the long run. The amount or interest paid over 40 years will be more than over 30 years.