While it might seem the availability of home loans for those with bad credit is a leap too far for qualifying applicants, the fact is that once basic criteria are met, approval is a strong possibility. This is partly because low credit scores are commonplace today, and some of the most trustworthy applicants have been caught out in the past.
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One of the key criteria is to have a reliable income, but others relate to the credit scores and their influence on interest rates, and the debt-to-income ratio that can indicate whether another loan is affordable at all.
The overriding fact, of course, is that a home loan is a major investment that the borrower must commit to repay for decades. So, lenders are understandably nervous when they consider applications with less than a perfect credit history.
By taking careful note of these few point, it is possible to construct an application that is more likely to be approved.
The Significance of Bad Credit
The mistake that many applicants make is to think that bad credit scores are enough to ensure rejection. The truth is that these scores are only taken into account in terms of the interest rate that must be paid. So, home loans for those with bad credit are affordable if other criteria can guarantee repayments will be made on time.
Generally speaking bad credit ratings are anything below 650, though the lower the score is the redder the flag is. A reliable income might save the day, but monthly repayments must still be taken into account. Anything over 700 (with the maximum score being 800) makes the application very likely to be approved.
With lower scores, the interest rate charged on the home loan will be higher. Should the score be increased then the rate falls and savings can be made.
The Debt-to-Income Ratio
Of course, while the size of the income is certainly important, that is not enough to get approval either. The important element for anyone offering home loans for people with bad credit is that the repayments are affordable.
Most applicants believe that they can afford the repayments, but lenders have a different guide to ours. Their rule of law is the debt-to-income ratio, which stipulates that no more than 40% of the excess of a reliable income should be dedicated to repaying debts.
The ratio is designed to ensure there is always enough to cover the unexpected expenses that can pop up, like emergency medical bills. Since a home loan cannot be missed for as many as 30 years, then it is important not to upset the balance of payments.
Where to Find One
Knowing where to go to find the best terms can be a key factor too. After all, a home loan for those with bad credit is likely to cost a lot if the best interest rates and repayment schedule are not secured.
Online lenders tend to offer the best deals, with traditional lenders charging more in interest. It is also easier to search for the right deal, with a multitude of comparison sites allowing quick comparisons to be made. But like all lenders, confirmation of age, credit history and a reliable income goes long way to getting the green light.
However, it is also necessary to check out the reputation of online lending firms before agreeing to sign up to a home loan with them. This can be done by going onto the Better Business Bureau website.