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Securing Mortgage Loans With Bad Credit: It Is No Dream

bad-credit-mortgage-loansIt 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.

Sarah Dinkins is a financial advisor who writes about Guaranteed Unsecured Credit Cards and 100% Guaranteed Bad Credit Loans

image: cdn.bills.com




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