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For those bad credit borrowers hoping to buy their own home, there is much to feel relieved about. While it might seem that getting a home loan with bad credit is practically impossible, there are options out there that can see their dream become a reality. However, as with all financial products, there are criteria and conditions to satisfy first.
For lenders, the economic uncertainties of the last few years have left them cautious so they are naturally hesitant when it comes to considering applications from those who may be seeking loan approval with poor credit history. But there are positive signs to be considered too.
An increasing number of mortgage providers are now offering carefully structured home loans for those with low credit scores, spurred on by the fact that many bad credit borrowers only became so as a result of the economic crises. So, as long as the criteria are met, approval is possible.
How To Qualify
So, what are the criteria that applicants need to satisfy if they are to successfully apply for a home loan with bad credit? Well, the basic conditions are pretty straightforward, with applicants needing to be over 18, US citizens (or legal long-time residents) and in full-time employment.
However, employment must also have been held for a period of at least 6 months prior to submitting the application, and all necessary documentation should be provided to prove the fact. The bottom line is that the mortgage provider has to be 100% sure the applicant is capable to making the repayments before they will consider granting approval with poor credit history.
Perhaps most significant of all, however, is that the lender must be sure that whatever financial troubles led to their credit score falling are over with. If a stable financial future can be indicated, there is a very strong chance of getting the home loan.
The Issue Of Existing Debt
One of the key factors in successfully applying for a home loan with bad credit is that the mortgage itself is proven to be affordable. And a critical part of that achievement is in showing that existing debt is not significant enough to cause trouble.
This is where the debt-to-income ratio comes into play, with its 40:60 limit stipulating that just 40% of excess income can be used to commit to loan repayments. What this means is that if mortgage repayments push the share over 40% then the application will be rejected.
So, securing approval with poor credit history is dependent on staying within the ratio. This might seem unfair, especially when it might seem that sufficient funds are there to make repayments. But the rule is designed to ensure the home loan borrower does not fall into further financial trouble.
How To Navigate The Ratio Rule
If the key issue in securing a home loan with bad credit is the impact of the debt-to-income ratio, it is worth noting that there are ways to navigate around the problem. The best way to do so is to clear existing debt, thus freeing up extra funds to cover mortgage repayments.
Using a debt consolidation loan, all existing debts can be paid off and replaced by a single debt. The cost of the debt is cut because 4 or 5 separate interest rates are replaced by one, and with a long enough loan term, the monthly repayments are slashed. With extra cash freed up, approval with poor credit history is helped greatly.
It is also possible to improve your chances of securing a home loan if the size of that loan is reduced. This can be done by increasing the size of the down payment made. By paying 20% of the purchase price as a down payment instead of 10%, the mortgage falls to 80%, instead of 90%.