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

• Know your credit score – the more prepared you can be going in, the better you will be able to negotiate and find the right loan.
• Before you start shopping for a house, know how much you can afford. That way you won’t fall in love with a property that is more expensive than your pocketbook will allow.
• Investigate the types of mortgage loans for bad credit that are out there – and determine the right type of loan. If you can do this before you talk to your mortgage broker it may be easier to keep from getting swayed by another loan product.
• Find a good mortgage lenders for bad credit by talking with friends and family, and also check with your real estate agent. Build up a good rapport with the broker – they will become your advocate.

Once you have your mortgage – there are some things you can do to get the most out of it.

• Start working on repairing your credit. Refer to article two about credit scores where we discuss what kinds of things impact your credit and how. Make sure to correct any credit report errors, start paying down existing credit cards or lines of credit.
• Make sure to always pay your bills on time. Many people find it helpful to set up automatic bill payments for the minimum amount so that payments are made without having to think about it.
• Put in some elbow grease and improve the value of your home. It will be easier to get refinanced with better terms if you have built up equity in your home. Keep on top of routine maintenance, make some cosmetic improvements and keep records of everything you do to improve the property.

Mortgage loans for people with bad credit have received a lot of negative attention in the media recently. Don’t let anyone make you feel bad about your situation. We all have gone through rough financial times.

Remember, there is nothing wrong with mortgages for people with bad credit – they are stepping stones to get you into a home of your own, help you start building equity, and give you an opportunity to rebuild your credit and eventually qualify for a mortgage with better terms.

I hope you’ve found this series on bad credit mortgages to be helpful – if you have, I would love to hear from you.

Here is the list of all the articles in this series:

Ins and Outs of a Bad Credit Mortgage | Part One: What are Bad Credit Mortgages?
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Ins and Outs of a Bad Credit Mortgage | Part One: How Much of a Bad Credit Mortgage Loan can you Qualify For?
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders
Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit

photo credit: rutlo

Links at the bottom of each article will take you to the next section, or refer back to the beginning for the table of contents.

What are Bad Credit Mortgage Loans?

There are two main categories of mortgage loans available today. One is a Traditional mortgage; the other is a non-conforming or subprime mortgage, also known as a mortgage for bad credit.

Traditional Mortgages

• FHA – One of the more widely used mortgage programs, FHA loans provide a wide range of options but require a minimum credit score of 620.
• VHA – If you are, or have been a member of the armed forces, there are special mortgage programs available for you. Regardless of your credit situation they are worth looking into.
• Fannie Mae – These are what are commonly known as conventional mortgages.  There are specific requirements , including a minimum of 2 years employment history and a credit score of 580 although most programs require 600 or more.

Subprime or Bad Credit Mortgages

There are a wide variety of bad credit loan mortgage programs available that do not meet the criteria of a traditional mortgage.  They typically have higher closing costs, interest rates and fees, but they allow for a lower credit score. Some programs are available with low down payments.

Before shopping for bad credit mortgage lenders, be sure to investigate your credit score and know if you need a bad credit mortgage or if you can possibly qualify for a traditional mortgage.

Bad credit mortgage lenders may not be FHA or Fannie Mae approved lenders, so they may not be able to offer you those programs. Be sure to talk to a number of mortgage lenders before you make your final decision.  Different lenders or brokers generally specialize in one type of loan or another. Remember to talk to a broker or lender who specializes in mortgages for bad credit if that is the type of loan you decide to go with.

In our next article, we will discuss finding your credit score, what the score means, and how to make the most of what you learn when you meet with a mortgage broker.

Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?

Here is a list of all the articles in this series:

Ins and Outs of a Bad Credit Mortgage | Part One: What are Bad Credit Mortgages?
Ins and Outs of a Bad Credit Mortgage | Part Two: Should I Repair my Credit?
Ins and Outs of a Bad Credit Mortgage | Part Three: How Much of a Bad Credit Mortgage Loan can you Qualify For?
Ins and Outs of a Bad Credit Mortgage | Part Four: Types of Mortgages for People with Bad Credit
Ins and Outs of a Bad Credit Mortgage | Part Five: Finding the Best Bad Credit Mortgage Lenders
Ins and Outs of a Bad Credit Mortgage | Part Six: Getting the Most out of Mortgages for Bad Credit


photo credit: kate.28