Monday, June 4, 2012

Getting Mortgage Loans With Bad Credit: The Black And White Facts

There are plenty of mortgage promises made to people wanting to buy a home, promises that suggest affordability, excellent terms and a great chance of approval. But when it comes down to it, seeking mortgage loans with bad credit is something of a challenge.

This is not just because of the large sums involved in purchasing a home, but in the fact that securing mortgage approval depends on certain factors that tend to be omitted in the promotional material. That is why, even with excellent credit scores, applicants can be turned down.

Knowing what really counts is the secret to making a strong application for a mortgage loan, and greatly improves the chances of getting the green light. So, here are some black and white facts that should be considered.

Debt-to-Income Ratio: Why It Matters

The first mistake made is to think that the credit score of an applicant is the number one consideration for lenders. The fact is that, when seeking mortgage loans with bad credit, the most significant fact is the existing debt that the applicant has. Debt and credit are two very different things, though the first clearly influences the second.

When an applicant already has loans to repay, the amount of additional credit lenders are willing to grant them is adjusted. This relates primarily to the amount of disposable income there is after the existing obligations are met, and is based on the fact that a new debt would lessen that figure considerably. So securing mortgage approval depends more on the available funds than the credit score.

The debt-to-income ratio stands at 40:60, which means that no more than 40% of an income can be used to repay debts. This is to ensure there is enough income available to handle those unexpected debts that can come from nowhere. So, 40% of the income must be enough to cover the mortgage loan.

Build a Strong Application

At the same time, putting together a strong application for a mortgage loan, with bad credit hanging over your head, is not as difficult as might be thought. It always comes down to two main things: ticking the right boxes and being affordable. This basically means meeting the required criteria and doing some careful calculating in advance.

Meeting the criteria is pretty standard, simply proving yourself to be over 18, be a US citizen and to have a reliable source of income that is sufficient to ensure repayments are possible. That is where the calculations come into play, with a variety of interest rates, repayment structures and loan lengths to consider. Often, securing mortgage approval depends more on repayment details than the size of the income.

What should be kept in mind, however, is that there are additional aspects that can greatly increase the chances of getting approval on a mortgage loan application.

Down Payments

The most popular is the size of the down payment to be made. For example, for a home worth 0,000, getting a mortgage loan with bad credit can be difficult. But if 10% of the purchase price was accounted for by a down payment, then the required mortgage sum falls to 5,000. If a sum of 20% can be paid, then that reduces the amount to borrow even more, so securing mortgage approval is that little bit easier.

Larger down payments also impress because of the financial discipline required to get that kind of sum of money together. Lenders recognize that anyone capable of saving so much so quickly can be trusted to repay a mortgage loan.

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