Not everyone looking to buy a home can boast an excellent credit history. For these bad credit borrowers, the challenge of securing the necessary financing is quite big. But there are lenders who are willing to accommodate applicants seeking home loans with bad credit.
Approval rests on the strength of the loan application, and in this regard, the chances of securing mortgage approval are heavily influenced by applicants themselves. Provide the right information to tick the boxes, and the green light is likely to be given.
What is more, taking some minor measures can greatly strengthen the home loan application overall. In fact, there are 3 measures in particular that bad credit applications should take before they submit the application.
1. Know Your Financial Status
It is important for applicants to know their financial standing before submitting any loan application. Taking time to read your own credit report from a credit agency gives an opportunity to spot the strengths and weaknesses of your application, something that is extremely useful when seeking home loans with bad credit.
The chief influence credit scores have it to dictate the interest rate to be charged on the mortgage. If the score is high, the interest is low; and if they are low, then the interest is high. Securing mortgage approval can depend on securing a low interest rate.
Borrowers who have a score of 700 or more are considered excellent, while anyone with less than 700 is included in the bad credit category. However, an applicant with 650 is in a stronger position that one with 500. A very low score will need to be improved before there can be any hope of getting a home loan.
2. Improve the Credit Score
There are two key ways in which credit scores can be improved, but both relate to actually clearing existing debts. With each debt fully repaid, the credit score is adjusted accordingly, so after 4 or 5 debts are cleared, it becomes more likely to get a home loan with bad credit.
The most expedient way to deal with debts is to take out a single consolidation loan to buy out the remaining balance of all the debts. The debt costs fall when there is only one loan to repay, freeing up extra cash in the process.
Of course, securing mortgage approval relies on more than scores, but since the total debt is restructured and spread over a longer period, the debt-to-income ratio is vastly improved too.
The other method is to take out a series of smaller loans, like payday loans, to pay off specific debts one by one. This is more costly, but the debts are cleared, with the payday loan paid off within 30 days also. So, the results are the same, with the home loan application strengthened.
3. Save A Down Payment
With affordability so essential when looking for a home loan with bad credit, making every effort to keep monthly mortgage payments low is important. A down payment helps to accomplish this by lowering the actual size of the required mortgage loan.
For example, a 10% down payment on a home worth $200,000, means a mortgage of $180,000 is needed. But making a larger down payment lowers the size of the home loan even more, improving affordability and increasing the chances of securing mortgage approval.
The only catch is the time that it takes to save perhaps 20% of the purchase price ($40,000). But lenders are often impressed by the level of financial discipline that went into saving such sums over relatively short periods – though it is also possible to secure a loan for the purpose too.