It is understandable that people would think bad credit scores would be enough to end their chances of securing a mortgage. After all, buying a home is far from cheap, and usually requires loans of $200,000 or more. However, getting a home loan with bad credit is not off the cards.
There are ways to secure a mortgage loan approval even with poor credit ratings, and it does not necessarily mean needing 2 incomes to rely upon. However, it does require finding the right mortgage provider, taking some measures to improve your situation, and carefully considering your options.
Through all of this, the overriding factor to keep in mind is that bad credit scores are not the killer of applications that many people believe. So, while the terms may not be ideal, the chance of securing a home loan still exists.
Why Credit Scores Do Not Matter
The financial crises over the past few years have affected practically everyone in the country. Now honest borrowers who have carefully managed their finances find themselves with low credit ratings, making it necessary to apply for home loans with bad credit to their name.
The score, however, is not the factor that decides whether the applicant gets mortgage loan approval or not. Issues such as income and the debt-to-income ratio are more significant in that area. A low credit score will really only influence the interest rate structure.
This does have an effect on the monthly repayments, and therefore the affordability of the home loan. But the truth is that even with terrible credit scores, if the debt-to-income ratio is low enough, and income is high enough, then approval is still possible.
Choosing a Subprime Lender
Of course, many traditional lenders would prefer to simply avoid the risk involved in lending to bad credit borrowers. As a matter of policy, it is hard to get home loans with bad credit from banks, but there are other lending options, like subprime lenders.
Subprime lenders are willing to accept the perceived risk of lending to people with very low scores. In fact, they specialize in bad credit lending, with borrowers with scores as low as 500 catered for. The terms may not be ideal, with high interest rates, but mortgage loan approval is much more likely than with traditional mortgage providers.
What makes these home loans affordable, however, is that the term is longer. A $200,000 mortgage over 30 years means monthly repayments of around $625, but over 40 years requires repayments of $450.
Choosing FHA Loans
It is also worth contacting the FHA to see if their mortgages are suitable. In fact, when seeking home loans with bad credit, they are often the best lender to go to. But it is necessary to qualify for their loan programs.
The programs are designed for applicants with scores of 560 or higher, while applicants must also already have at least a 12 month rental or mortgage history, and have at least 3 credit contracts – for example, a credit card and 2 other outstanding loans. Once these are confirmed, then mortgage loan approval is possible.
Through the FHA, affordable terms can be secured, with lower interest charged on the home loan. The issuer of the mortgage is an independent mortgage provider, but with the backing of a government organization, the risk is removed – thus ensuring affordable mortgages are on hand.
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