It is understandable if there is some confusion over how bad credit ratings do not automatically disqualify people for securing mortgage loans. After all, a mortgage is a major debt to take on, and so a poor credit score should logically work against the applicant. But it is not impossible to get mortgage loans with bad credit, and at acceptable terms too.
There are a number of reasons why what once carried a certain stigma with it, is no longer considered such a bad thing. One such reason has to do with the poor economic climate that has raged for the last few years, and how responsible borrowers have found themselves caught up in sticky financial situations as a result. So, for lenders, providing mortgage approval despite bad credit is not seen to be as risky as it once did.
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Still, getting mortgage loans approved does require some effort, with careful preparation often paying off for applicants.
What Bad Credit Means
The confusing aspect of bad credit scores is the role they actually play. Most people believe they are the basis on which approval is granted, but this is not true. They only serve as an indication as to the risk an applicant carries. So, approving mortgage loans with bad credit comes down to other factors.
It is important to remember that the scores provided by credit agencies are based only on the cold history of credit repayments. And there can be any number of events that affect the ability of borrowers to make those repayments. Not all of them are the fault of the borrower, like a job loss for example. In such cases, a mortgage approval, is not an impossibility.
The fact is that mortgage loans approved by lenders are structured to protect the loan granted as much as possible, so the lender is always likely to make a profit.
The Effect of Low Credit Rating
Where low credit ratings actually make a difference is with the loan limit and the interest rate that is charged. So, in seeking a mortgage loan with bad credit, it can become difficult to find the funds necessary to purchase your dream home. This is where a realistic application is so important, with lenders less likely to reject an application for a loan that is affordable.
For example, in order to get mortgage approval, the sum needs to be within the loan limit. A credit score of 600 may mean a mortgage loan limit of $250,000, which means any mortgage larger than that sum will be rejected immediately.
But even if the property desired costs $225,000, the score will mean a higher than usual rate of interest is paid, so the realistic debt is much higher. A repayment of $1,000 per month might be the maximum affordable, but with higher interest it may be $1,100, so it is unlikely to get approved.
Loan Criteria
The simple fact is that once an applicant meets the required criteria, it is difficult to justify not granting even a mortgage loan with bad credit. The key criteria comes down having sufficient income, having a down payment ready. Having a large enough income is only logical when seeking mortgage loan approval despite bad credit.
The down payment is important because it reduces the size of loan required - thus, getting a mortgage loan approved is more likely. However, saving a down payment of perhaps $20,000 requires discipline, which is a good indicator and improves the chances of securing a mortgage loan with bad credit.
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