Buying a home is a major commitment, arguably the biggest that anyone will ever take on. It is not just the amount of money involved, but the fact that failure to maintain repayments will mean losing the home. The pressure is therefore huge. But how can someone get a home loan with bad credit issues hanging over them?
While it is true that bad credit ratings do not have a positive impact on any loan application, it is also true that there are ways around the problem. The reason is that securing mortgage approval is dependent on the quality of the application rather than the credit scores of the applicant.
But when it comes to putting together a winning home loan application, what is needed? The good news is that it is not difficult to strengthen an application to make it attractive to lenders, with some planned moves ensuring the best chance of success.
Why Bad Credit Is No Big Issue
Traditional lenders have always used bad credit scores as a reason for turning down a loan application. This is because a low score is traditionally believed to mean the borrower is more likely to default on the loan. When seeking a home loan with bad credit, being able to prove this will not be the case is vital.
The fact is that a credit score only indicates the history that the applicant has, but does not accurately indicate their current situation. There may have been difficult financial times in the past, for example being unemployed, but now the applicant may have a new (or even improved) source of income.
When securing mortgage approval it is income that is of much greater significance. So, there is no reason to think that a poor credit history should hold your home loan application back. It is all a matter of establishing affordability.
The Key Factors
Affordability is the key factor, but there are two elements that go to establishing this. These are the income of the applicant and the amount of debt that the applicant already has. If these two aspects are in good order then the chances of getting a home loan with bad credit are very strong.
Income is an obvious condition when applying for a mortgage, and it is essential that the size of the income must be enough to meet the monthly repayments with comfort. Lenders are not interested in straining financial situations, so securing mortgage approval can only be achieved if heavy financial problems are avoided as a result.
The debt-to-income ratio reflects the amount of debt that already exists, and how much credit strains an applicant is already under. It is calculated by measuring income against existing monthly expenses, and home loans are only granted if the repayments keep the percentage income committed to debts to less than 40%.
Strengthening Your Application
So, what can be done to strengthen your application? Well, the improving your credit score is a help, but lowering your existing debt is more beneficial. Happily, both can be accomplished at the same time, so getting a home loan with bad credit need not be ruled out.
It would be a good idea to use a consolidation loan to clear some or all of the existing debt. However, it is important the repayments on the loan are significantly less than the current combined monthly repayments.
This helps in securing mortgage approval because, with each debt repaid in full, the credit score is increased. And with a lower sum to pay each month, the amount of excess income available to commit to repayments on the home loan is increased too.
By Martin Fisher