Monday, June 18, 2012

Getting A Home Loan With Bad Credit: Tips To Help Get A Green Light

It is understandable that many believe getting a home loan with bad credit is too difficult to make the effort worthwhile. Lenders are not encouraged by bad credit borrowers when assessing modest loan applications, so why would they grant them a loan of hundreds of thousands of dollars?

In fact, as long as the criteria are met and the affordability test stands up to scrutiny, securing mortgage approval with a poor credit rating is something that is very possible. Traditional mortgage providers may be hesitant, but certain alternative lenders are willing to accept the associated risks.

Still, that is not to say that home loan approval is practically guaranteed. There are some steps that can be taken to greatly improve the chances of getting the green light on financing. Knowing them, and how they can benefit your application, is invaluable.

Improve Your Credit Score

A bad credit rating is going to have a negative effect on a loan application, but not a fatal one. The credit score affects only the interest rate charged but cannot be the basis of rejection. This means that a home loan with bad credit can be approved, though it could be more expensive.

This also means that improving the score will lower the interest rate charged, thus making the task of securing mortgage approval that bit easier. In fact, depending on the size and term of the mortgage, anything between and 0 per month can be saved. But increasing the score requires time and effort.

Basically, clearing some existing debts is the only way to improve the credit score. To accomplish this, take out a long-term consolidation loan with competitive interest rates, to clear outstanding balances. This should also free up some extra cash to commit to repaying the home loan.

Provide a Large Down Payment

A second step towards securing a home loan with bad credit is to provide a larger down payment. A down payment is usually seen as simply a cash payment to seal the deal, but in fact is it much more useful than that. For a start, the larger the payment, the lower the required mortgage sum.

The size of the required mortgage obviously dictates the size of the debt, the repayment sum and the interest rate charged. So, the influence of the down payment is significant. Usually, 5% to 10% is expected, so to buy a 0,000 home, a mortgage of up to 0,000 to 0,000 is needed. But if a 20% down payment is made, the required loan falls to 0,000, so securing mortgage approval becomes easier.

The catch is to secure the cash sum needed to make a ,000 down payment. This can take considerable time, but if accomplished, home loan lenders never fail to notice the financial discipline required.

Choose a Long-Term Mortgage

It is always worth considering taking a longer term mortgage, perhaps 40 years rather than the common 30-year term. While it is true that it would mean paying more in interest over the lifetime of the mortgage, it also means that mortgage becomes more affordable. Affordability is crucial when seeking home loans with bad credit.

It all comes down to the number of times the mortgage principal is divided up, with 30 years meaning 360 equal parts. With a 0,000 mortgage, for example, that means 5 every month. But with a 40-year mortgage, the monthly share falls to 5. Obviously, the lower sum makes securing mortgage approval that bit easier.

And even if it does take 10 years longer repay the home loan in full, the improved chances of getting the application approved is the priority.

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