Getting your hands on a mortgage loan with bad credit hanging over your head is generally believed to be next to impossible. And with the current economic climate, the difficulties that exist are even more acute. Lenders just do not like taking that kind of risk.
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But the good news is that there are opportunities for individuals with a less than impressive credit score to secure the funding they need to buy the home they want. True, the mortgage loans with bad credit many lenders offer are not the best deals in terms of interest rates and other terms, but there is no doubt they give the chance to purchase property.
The trick is convincing the lenders who offer mortgage approval for those with bad credit that their trust is worthwhile. There are three factors to an application that can play a big part in achieving this.
Large Down Payment
Everyone understands that in getting any mortgage, a home buyer needs to place a down payment on the property. It effectively seals the deal, but when seeking a mortgage loan with bad credit, it takes on more significant roles.
Firstly, it reduces the size of the mortgage required, and secondly, it convinces the lender that the applicant for a mortgage loan is a disciplined money manager. The higher the size of the down payment, the lower the loan needs to be, which means that the monthly repayments are lower and, usually, the term of the mortgage is shorter.
Perhaps the most important factor is that the discipline needed to save 10% to 20% of the value of the property (which could mean $20,000 or more) is quite impressive. It shows the kind of commitment that every lender wants to see before giving mortgage approval for those with bad credit.
Proof of Employment
It only stands to reason that anyone seeking a mortgage loan with poor credit would need to prove they are employed. After all, employment means an income, which in turn means there are funds with which to make monthly repayments.
However, just being employed is not enough. It is necessary to prove the monthly income is sufficient to sustain repayments for might be three decades. So, it is worth remembering that with mortgage loans with bad credit, the debt-to-income ratio is important too.
This ratio shows exactly how much excess income there is to cover repayments. Lenders who offer mortgage approval for those with bad credit stick rigidly to the 40:60 ratio standard, because it is designed to ensure there is room to cover any unexpected expenses. If this ratio is not broken, then approval is much more likely.
Signs of Reform
The third secret to securing approval on a mortgage loan with poor credit is providing sufficient signs of reform. This relates to improvements in the credit rating the applicant has, indicating that the troubles of the past are truly in the past.
Of course, bad credit may not always be down to bad spending habits, with investments lost and sudden drops in income playing havoc with making repayments on existing loans. What the lender wants to see before giving the green light on a mortgage loan is that a proactive approach is being taken.
Some steps lenders might like to see before giving mortgage approval for those with poor credit are a consolidation loan taken out to take full control of existing total debt, or perhaps a series of smaller loans used to clear individual debts, which have been repaid on schedule.
If there are genuine signs of improvement in money management then getting approval on a mortgage loan with bad credit is much more likely.