Nobody will argue with the claim that lenders like mortgage applicants with an excellent credit history. The element of risk is less, confidence in obtaining a return on their investment is high and everyone is happy. But what about those seeking home loans with bad credit?
It is a different story for bad credit borrowers, who extremely find secure mortgage approval harder to achieve. But, while it is harder, it is by no means impossible. There are lenders willing to accept the higher risk, if the applicant is willing to accept some compromises.
The fact is that credit ratings are not the most important aspect of a loan application. What is greater interest to lenders is that the applicant has a steady income from a secure job. Then they can feel confident the home loan will be repaid. However, there are some steps that, if taken, can strengthen the application overall.
1. Know Your Financial Status
For anyone seeking a loan, the first thing to do is to establish your financial status. This is basically finding out your credit score and, if it is poor, assessing how to improve it before submitting the applications. Given the amount of money involved, this is especially important when seeking home loans with bad credit.
All that is needed to do is get your credit report from the credit agencies. These are simple to secure online, with many lending institutions offering access to a free version of the credit report. However, it is possible to order the full report directly from the agencies themselves.
The chief advantage of having this information is improving the chances of securing mortgage approval. And if the score looks low and does not include information on a recently cleared loan, it is possible to get the score reviewed. A higher score means a lower interest rate will be charged on the home loan.
2. Consider Pre-Approval
In truth, this is not a step that improves the chances of approval, but it is a way to improve the chances of securing the best possible new home. The typical approval process takes between 60 days and 90 days, so applying for a home loan, with bad credit or good, takes time.
The problem with taking time is that if the application is submitted after finding the preferred property, then by the time the process is complete, the property is almost guaranteed to have been sold to someone else. By securing mortgage approval in advance, the borrower is able to buy the home they want immediately.
However, pre-approval does not mean a lower interest rate is charged. The benefit of securing the home loan before home hunting lies in the greater purchase power.
3. Find a Cosigner
It can be difficult to secure a home loan with bad credit that does not have a high interest rate. Normally, mortgages come at a rate of between 5% and 6%, depending on the lender, but with bad credit part of the ratio, the rate can double to between 10% and 12%.
But adding a cosigner to the application can see the interest rate fall back down to its normal level. The reason is that a cosigner is a guarantor, promising to make the monthly repayments if the borrower is unable to. This assurance effectively removes the risk factor, so there is no reason for the lender to seek compensation through a higher interest rate.
This can be the key to securing mortgage approval, but there are conditions. The cosigner must have a larger enough income and have an excellent credit history to be accepted in the deal. Once the candidate is, approval on the home loan is almost assured.