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It would be foolish to think that anyone with a poor credit history can expect no joy when applying for a mortgage. The fact is that applicants seeking a home loan with bad credit have options open to them and as long as the necessary criteria and conditions are met, approval is always on the cards.
What is certainly true is that, as with all applicants, securing mortgage approval can only come after a lengthy period of scrutiny, with the detailed examination of an application taking between 60 and 90 days. But there are still plenty of alternative lenders in the market open to the idea of approval, and willing to accept the risks involved.
Of course, with such scrutiny, it is imperative that an application for a home loan is in as good a shape as possible. Thankfully, there are several things that can be done in advance that improve the chances of approval, but there are 3 in particular that can have a big impact.
1. Increase Your Down Payment
When applying for a home loan with bad credit, reducing the size of the require mortgage can be a very effective way of getting approval. The most effective way to do this is to increase the size of the down payment. Since the payment represents a percentage of the purchase price, the larger it is, the smaller the balance to be covered by the mortgage.
For example, if a home is on the market for $250,000, and the normal 10% down payment is made, a mortgage of $225,000 is needed. By increasing the payment to 20%, the mortgage is reduced to $200,000. Logic dictates that securing mortgage approval is more likely for $200,000 than $225,000.
Of course, it takes a lot of time and financial discipline to gather $50,000 together to use as the down payment. But the funds can be raised in a number of ways - for example, a personal loan. But remember that the benefits to the home loan terms can make the effort worthwhile, with lower interest rates likely.
2. Get Your Score In Order
Affordability is the key word when it comes to any loan, and one of the factors that can adversely affect affordability is the credit score an applicant has. The score itself is never the basis of a rejection, but a home loan with bad credit is going to feature higher interest rates, which increases the size of the monthly repayments.
By improving your credit score, it is possible to get a lower rate and, therefore, make the mortgage more affordable. Of course, there are other factors involved in securing mortgage approval. The debt-to-income ratio also has a major influence, while agreeing a longer mortgage term helps greatly too.
The bottom line is that if the monthly repayments on the home loan can be kept low, then the whole deal can be deemed to be within the safe reach of even a bad credit borrower.
3. Agree A Longer Term
So, how can a longer term mortgage be beneficial? Surely, it only adds to the expense since the amount of interest paid over the loan period is increased dramatically. Well, this point is true, but the bottom line for lenders is that the borrower is able to make the repayments, especially when the applicant is seeking a home loan with bad credit.
By adding an extra 10 years to the term of the mortgage, the monthly repayments can be reduced dramatically. For example, with a 30-year deal, a $200,000 principal is divided into 360 monthly shares of $555; over 40 years, the same mortgage principal is divided into 480 monthly shares of $416.
When securing mortgage approval rests on affordability, the latter home loan term is more likely to be successful.