Even if you have a bad credit score, you can still qualify for a mortgage for bad credit. Sure, the financial requirements may be different for any of the mortgage loans for people with bad credit but you still have the opportunity to prove yourself once again creditworthy by taking this course of action to improve your past financial history.
Primary Considerations for Approving Mortgage Loans for People with Bad Credit
Mortgage lenders for bad credit are typically referred to as sub-prime lenders. These lenders are non-traditional lenders whose main responsibility is to help you, the sub-prime borrower, obtain a mortgage for bad credit loan. Normally, there are two criteria they use to establish whether you’re a viable candidate for any of the mortgages for bad credit that are available. One criterion used to determine a candidate’s suitability for any of the mortgage loans for people with bad credit is one’s debt-to-income ratio. In other words, your income should exceed your expenses with respect to gaining approval for a bad credit mortgage loan.
The other criterion used is the loan-to-value ratio. The lender uses this calculation to qualify you based on the requested amount of the loan as compared with the property’s value or worth of the collateral you’re trying to purchase.
Other Considerations for Approval
Once the sub-prime lender has determined you meet the above calculations, he looks at your credit score. Before applying for any of the mortgages for people with bad credit, it’s good to obtain a copy of your FICO score for your review. That way, you’ll be better able to work with your lender in order to prove your reliability for repaying this “second chance” higher interest loan. Explain to him, if feasible, reasons for defaults or late payments. Lenders tend to be more understanding if such delinquencies were due, in part, to being laid off or because of a divorce settlement.
Your loan will be considered as well on your net income or income after taxes. Also, if you can apply for the loan offering some kind of down payment, your chances will be improved. Typically, a home should not be purchased that is more than two and one-half times your income per annum. Therefore, trying to apply for a mortgage for more than this amount may prove to be a hardship down the road which is especially important to keep in mind if you’re applying for a bad credit mortgage loan.
Types of Bad Credit Mortgage Loans
The two basic types of mortgage loans for bad credit are a fixed rate type mortgage and the adjustable rate mortgage, normally referred to as an ARM.
The fixed rate mortgage is a long-term secured loan whose interest rate, as the name implies, remains fixed through the life of the loan. On the other hand, an ARM is a secured loan whose interest rate can vary depending on the current market conditions.
Sometimes an ARM is a good mortgage for bad credit loan as the interest for the first year of the loan is substantially lower than other rates prevailing at the time. Thereafter, the rate is typically adjusted and the payment is determined on the amount of interest based on the market index to which it’s tied.
Final Suggestions
Whatever type of bad credit mortgage loan you choose, make sure you secure the lowest “high interest” rate you can. Be assured if you prove your ability to meet your payments on a regular basis that you have the opportunity to refinance at a lower interest rate at a later time.
When you secure your loan, get into the habit of paying bills on time and carrying credit card balances that are approximately within 25% of the limits on the cards. That way you can start on a progressive track to a better credit score and a happier financial future.
photo credit: Ryan Stanton