Once the bubble burst, the property market was hit quite seriously. In fact, it was in this category that the vast majority of financial casualties really felt the pinch. So, when mortgage lenders say they are willing to grant home loans with bad credit it might seem like an act of foolishness. But there are good reasons to support their decision.
For anyone with a bad credit score, there is certainly a greater challenge in securing mortgage approval than for anyone with a good credit history. But in some cases, lenders can recognize that the potential to meet repayments comfortably does exist, despite what the credit rating might suggest.
Knowing that a home loan is still a feasible commitment makes giving the application the green light perfectly sensible. But what are the signs that lenders look for that tell them that the applicant is a good investment despite their poor scores?
Signs of Credit Improvement
The first positive indication from the point of view of the lender is that the applicant has been making an effort to improve their credit score. There are a few reasons why this can be received so well, not least because those seeking a home loan with bad credit are effectively making the mortgage more affordable.
Bad credit borrowers can have scores of anything between 530 and 680, with scores below 550 generally ruling out any realistic chance of securing mortgage approval. Improving the score can be accomplished by taking out a consolidation loan and buying out existing debts. With each debt cleared, the score goes up, so if 5 debts are cleared, it can see the score jump by almost 100 points.
Even though a consolidation loan has been taken on, the new debt is structured to ensure the monthly repayments are significantly less. This also reduces the chances of a home loan being rejected. However, the chief positive lenders see is that the applicant is showing genuine commitment to handling the debt.
Offering a Larger Down Payment
Much as improving your credit score can have a positive impact on an application, lenders also think highly of applicants who are willing to make a lager down payment on their new home. There are two reasons why this helps an applicant seeking a home loan with bad credit.
Firstly, the fact that a down payment is made at all reduces the size of the required mortgage, it stands to reason that securing mortgage approval is easier when the debt itself is lower – for example, $160,000 instead of $180,000. A larger down payment ensures repayments are lower and, therefore, the mortgage is more affordable.
The second reason is that the discipline required to save a large lump sum to use as a down payment is very significant. That also reflects commitment on the part of the applicant, suggesting the home loan would be in safe hands.
Seeking The Right Terms
It is generally believed that lenders do not appreciate those looking for improved terms when applying for a home loan with bad credit but in fact, the opposite is true. Lenders tend to be suspicious of applicants who simply accept the terms that are given to them, even if it is to the benefit of the lender.
Why is this? Well, it comes down to the attitude of the applicant, and the seriousness with which they meet the obligations set by the mortgage. Those that are very commitment set their eyes on securing mortgage approval with the best possible terms. After all, the commitment has to last for perhaps 30 years.
The worth of seeking better terms is evident when saving just $100 in monthly repayments on a home loan translates to a total of $36,000 over the lifetime of a 30-year mortgage.
By Adam Gardner