Getting Home Mortgage Loans With Bad Credit: Two Decisive Factors to Consider

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For people with low credit scores, the confidence level they have when seeking a mortgage is pretty low. This is because generally those applying for home mortgage loans with bad credit ratings are seen to be too big a risk for the large sums that lenders would have to part with.

But it is worth taking into account that a credit score is never a decisive factor when applications are being assessed by lenders. For those with an accurate understanding, FICO credit scores are useful at best but nothing to really loose sleep over. They have an influence over the process, but in a secondary way rather than directly.

By far more significant in the whole approval process for any home mortgage loan are the payment history and the debt-to-income ratio that the applicant has.

Payment History

Of more interest to lenders is the payment history that an applicant has. This is because lenders understand that not everyone applying for a home mortgage loan with bad credit shares the same type of credit history.

The reason is that a credit score is calculated on the cold facts, and does not take situations into account. By understanding FICO credit scores, and how they are calculated, the lender is better able to assess the reality of the perceived risk and look for the information that really matters.

For example, one applicant might have a low credit rating because they have not managed their finances well, preferring to have a good time over meeting their financial obligations. But another applicant may have a similarly low rating because they have fallen on hard times. Perhaps they lost their job, causing them to default on payments. When it comes to home mortgage loans, the applicant has an honest history but was affected by circumstances.

Debt-to-Income Ratio

This factor is the most influential of the lot. It relates not to credit scores or payment history, or even to income, but to whether or not the applicant has the ability to make repayments at all. Interestingly, it is this factor that makes approval a possibility, even if the applicant is seeking a home mortgage loan with bad credit.

The ratio is provided as a guide to prevent borrowers from over-extending themselves with too much debt. The accepted ratio is 40:60, which means that only 40% of the available income is considered by lenders. If that amount is not enough to cover monthly repayments, then the application of the particular home mortgage loan is rejected.

There is a general understanding FICO credit scores have an influence because of how it can affect the interest rate to be charged, and therefore the size of the repayments. However, the score itself has no bearing on a rejection or approval of an application. This is proven by the fact that people with excellent credit scores are rejected if they do not measure up to the debt-to-income ratio.

The Bad Credit Influence

Of course, it is impossible for lenders to completely ignore the rating. It does, at the very least, provide a picture of the applicant seeking a home mortgage loan with bad credit. But it would be inaccurate to state that the rating - whether high or low - is a decisive factor.

In understanding FICO credit scores, financial advisors underline the advantages of improving the score when preparing an application. It can be worth spending a year taking out small personal loans and repaying them quickly in order to improve the score, and even taking out a consolidating loan to ensure everything is under control.

In this way, the chances of getting a home mortgage loan approved are greatly improved.

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