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Securing A Mortgage Loan With Bad Credit

The whole process of applying for a mortgage loan with bad credit lingering is strewn with uncertainty. At least, that is typically the feeling of the applicants themselves. But there is reason to have greater confidence.

The task of securing approval from lenders is made easier when three key aspects are addressed properly in advance. There are, after all, more important factors involved in the approval process than a credit score.

These three important aspects relate to the employment of the applicant, the saving of a large down payment and the commitment the mortgage loan applicant has shown to improving their situation.

1. Reliable Employment

Income is certainly important, but regardless of how much is earned, it is the reliability of the employment an applicant has that is of more interest to lenders. Being able to prove employment is especially important for those applying for mortgage loans with bad credit.

The fact is that securing approval from lenders rests in essence on the ability of prove that repayments will be made without a hitch, and that the lenders will get their money back. This is why applicants who have only started a new job benefit little, even if their income is quite good.

Lenders usually include in their criteria a minimum employment history of 6 months in the job, and sometimes a letter from employers, as proof that it is a long-term appointment. At best, this indicates the position is full-time, thereby making a commitment to repaying a mortgage loan viable.

2. Signs of Credit Score Improvement

The significance of a credit score may be limited, but there is a lot to say for applicants that are visibly making efforts to improve theirs. When seeking a mortgage loan with bad credit, providing evidence to suggest that the bad credit rating has or will be improved on, is highly valuable. This is because the lender understands that situations can change and the circumstances that contributed to a low score can be overcome.

All that is needed to improve the chances of securing approval from lenders is to take some proactive steps, like taking out a consolidating loan to better control existing debt and lower monthly repayments. Or perhaps to take out a series of small personal loans to repay quickly and improve the score directly.

However, even if these moves fail to make any real impact on a credit score, the fact that efforts are being made is a pleasing to lenders. It tells them that the applicant is prepared to commit to the mortgage loan and make a concerted effort not to miss repayments.

3. Provide a Large Down Payment

While taking proactive steps may be important, the most proactive move is clearly saving a large down payment. When it comes to people applying for a mortgage loan with bad credit, having $10,000 or $20,000 to hand to make a down payment is hugely impressive.

The reason is two-fold. Firstly, the larger the down payment the more significantly the required mortgage sum will be reduced. For example, a property worth $200,000 needs a loan of $180,000 if a 10% down payment is made. The risk is therefore lessened, so securing approval from lenders is more likely.

The other aspect is that the degree of financial discipline required to save a large sum, like $20,000, is exactly the type of discipline that those funding a mortgage loan want to see. That kind of money cannot be saved with a frivolous attitude, so lenders are confident they can trust the borrower.

For many people with bad credit, mortgage loans seem like a very slim possibility. They believe that the key to getting a mortgage is their credit score which means there is no way for them to succeed. However, the determination of mortgage loans is actually based on far more than just one, three-digit number. In fact, people with good credit can get denied.

Rather than focus on credit alone, the determination by a lender to grant a mortgage loan is far more complex. If you have bad credit and want a mortgage loan, there are real steps that you can take in order to increase your chances of getting the loan you need. Remember this: a lender only wants one thing from you when he gives you a mortgage loan with bad credit or good credit, on-time repayment. The key is proving to the lender that this is a possibility.

The Importance of a Good Ratio

Good credit does not guarantee that a person can get a mortgage loan the same way that bad credit does not doom them to rejection. That is because mortgage loans are based on several criteria that look at a borrower's past, present, and future in finance. Principle among these considerations is the current ratio of that borrower's income and debts. When it comes to this ratio, the golden number is 40. No more than 40% of your current income can be assigned to the repayment of existing debt. In other words, if you make $10,000 a month, only $4,000 should be going to pay off existing debt. Otherwise, the addition of a mortgage loan would stretch your available income too far.

Show Them You Have Changed

Along the lines of debt, lenders will consider you for a mortgage loan with bad credit if the reasons for your bad credit are behind you. It is well known that it is easy to ruin your credit, but harder to build it back up. Facing a crisis years ago, perhaps a sudden job loss or a medical disaster, may have sent your credit plummeting. However, if you have spent all the time since then getting back on your feet and resuming responsible financial management practices, lenders will respond to that change.

Emergencies happen. What you need to show is that, outside of the unavoidable, you can do what it takes to manage your money and repay your debts.

The Smaller the Loan, the Easier the Approval

It's easier to get small loans than large ones. Therefore, you should take the value of your mortgage loan into consideration. With bad credit, the less money you ask for the more likely you are to get approved. There are two ways that you can work to lower the amount of money you need. First, save up a large sum for a down payment. The more cash at hand, the less credit is needed. Next, consider changing the amount of money you plan to spend on the home you want. Look for deals, consider smaller properties, or look into different areas where home prices are more reasonable.

Don't Give Up Hope

The final step that you can take towards homeownership and getting a mortgage loan with bad credit is making sure to keep your goal in mind and your outlook positive. If you still cannot get a loan after following this advice you are not lost forever. Continue to work on responsibly repaying the bills you currently have, eliminating debt, and improving your credit score. Over time, that bad credit will become less so and the mortgage loan you need will be easy to achieve.

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Securing Mortgage Loans With Bad Credit: It Is No Dream

It might come as a surprise that the chances of securing approval on a mortgage loan with bad credit is not as impossible as many believe.

The reality is that securing approval on applications for any loan, even with a low credit score, is possible as long as the key criteria are met. Once that is done, then there is little reason for lenders to turn the application down.

Of course, low scores do have an influence, with the affordability of mortgage loans affected directly by the interest rates that lenders charge, and the rate affected by the perceived risk associated with the applicant. Understanding the significance of bad credit is important when putting together an application strategy.

The Influence of Bad Credit Scores

The influence that bad credit scores have on the approval process is not actually as great as many people think. So for someone seeking a mortgage loan with bad credit to their name, it is not so impossible to be given the thumbs up.

This is because lenders agree that the reasons for a low credit rating can vary, and do not necessarily mean the applicant cannot be trusted to repay their debt. These scores are calculated by hard evidence, but does not reflect the situations. So, a sudden loss of employment may result in a personal loan being defaulted upon, but a restored employment changes the situation again. When it comes to securing approval on applications for a loan of any kind, lenders are happy to examine other factors.

For mortgage loans, despite the sheer size of the debt being taken on, elements like current income, employment security and the amount of excess income available for monthly repayments are of greater interest than a credit rating.

Credit Scores on Interest Rates

Where credit scores do have an influence is the interest rate that is charged by the lenders. Higher rates are down to the fact that lenders are perceived to be accepting a greater risk, and need to recoup their money. And this is where applicants for mortgage loans with bad credit are affected.

For example, an applicant with a credit score of 600 will pay a higher interest rate that one with a score of 700. So, even with the same mortgage sum borrowed, over the same term and from the same lender, the former will have higher monthly repayments than the latter. When it comes to securing approval on applications for such large sums, this is an important factor to consider.

It is important to realize, however, that lenders will reject an application for mortgage loans on the basis of the affordability of the repayments, rather than the scores themselves.

The Debt-to-Income Ratio

Assessing what is affordable comes down to the something known as the debt-to-income ratio, which is effectively an assessment of the amount of income available to cover new debt. Those seeking mortgage loans with bad credit hanging over their heads can see their application succeed if the ratio is within the 40:60 rate that is deemed acceptable.

This ratio means that no more than 40% of the available income can be dedicated to repaying the new debt. An applicant with excess income of $1,000 per month will not be allowed to take on a debt that requires payments of more than $400. So, securing approval on applications is not simply down to income, but how much 40% of that income is.

The ratio exists because of the need to handle unexpected expenses, like medical costs and other emergencies. Statistically, it is these sudden expenses that cause so much havoc with repaying mortgage loans. So, having 60% in reserve for these unforeseen costs is important.

When it comes to strengthening applications for mortgage loans with bad credit, there are a few areas that should be addressed. From the basic requirements associated with such large loans to the amount of available income there is to take on additional debt, these areas are effectively the key to success.

The basis of this fact is that securing approval from lenders does not depend on the credit rating that an applicant has. Instead, the credit ratio is central to convincing lenders that the required monthly repayments is affordable, while the size of the down payment is equally telling.

So, when seeking approval on an application for a mortgage loan, these are much more significant areas to pay attention to.

Basic Requirements to Meet

Like every other financing deal, there are requirements that must be met before an applicant can qualify for a loan package. When it comes to applicants seeking mortgage loans with bad credit to their names, these requirements are particularly acute.

The key criteria is nothing particularly special. Applicants must prove they have full-time employment, and are earning a sufficient income to make the monthly repayments. Securing approval from lenders also depends basic legal criteria, such as proof of age (over 18), and citizenship.

Further requirements stated, depending on the policies of individual lenders. Some insist employment must have been held for a minimum of 6 months, while others require proof of efforts to improve their financial situation before applying for a mortgage loan.

Ensuring the Right Credit Ratio

A key concern for those applying for mortgage loans with bad credit is the credit ratio that lenders view so highly. Known also as the debt-to-income ratio, it relates to the degree of debt that an applicant already has and, therefore, the ability to take on any further debt.

The ratio is set at 40:60, which means that only 40% of the available income can be dedicated to paying off debts. This means that securing approval from lenders principally depends on meeting the ratio standard. If the available income, after existing debt and expenses is taken into account, extends to more than 40%, then the application will be rejected.

In this respect, the credit history of the applicant is meaningless. All that matters is that the ability to repay the mortgage loan exists in the first place. Once that is confirmed, the likelihood of getting the thumbs up is greatly improved.

Providing A Down Payment

Any applicant that is able to provide a down payment makes a very positive impression with the lender assessing their application. Often, the reason that applicants seeking mortgage loans with bad credit get the green light is that they have as much as 10% of the property value available as a down payment.

The reasons rest in the fact that to gather such a large sum of money requires a considerable amount of effort and discipline, so the applicant obviously is showing a real commitment to the responsibilities involved. This does absolutely no damage when it comes to securing approval from lenders that might otherwise have been unsure about trustworthiness of the applicant.

But, in practical terms, making a down payment means the required mortgage loan is also reduced, thereby lessening the risk and the principal debt. It also reduces the required monthly payments, the interest rates and making everything that little bit more manageable.

Hilary Bowman is a Financial Expert who specializes in Loans for People with No Credit and Bad Credit Loans.

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