Generally speaking, the thought of receiving a home loan with bad credit seems impossible. However, like all aspects of life, credit scores and home loans are not simply black and white. There are shades of grey that allow lenders to offer these kind of loans based on the circumstances surrounding their credit score. It is therefore important for anyone considering applying to review what, exactly, they can offer to a lender in order to get the money that they need.
Why All Bad Credit Is Not Created Equal
Whether or not a person is labeled as having so-called "bad credit" is determined based on a number of factors and then boiled down into a number called a FICO credit score. This number will range between 300 and 800 points. Generally, any score below 650 is considered a risk in terms of lending. Obviously, the lower your score, the greater the risk you pose to a lender.
The calculation of a FICO score takes into account many aspects of a borrower's financial history. This includes past payments, loan defaults and the credit to debt ratio of the borrower at the time of his loan application. However, while these numbers are easy enough to determine, their justifications are as diverse as the people who claim them.
Reasons for Bad Credit Matter
Basically, when you apply, the lender will consider a few elements. First, he will want to know how low your actual score is - he is far likely to be able to work with someone with a score in the high 500s or low 600s as compared to someone with a score 550 or lower.
Then, he will want to know why your score is so low. Did you spend money you didn't have and rack up a lot of credit card debt? Did you lie on previous credit applications and get loans that you could not afford? Or, were you a victim of circumstance? Did you get laid off from a high paying job or were you strapped with sudden, unexpected medical bills that you could not immediately pay?
The circumstances surrounding your bad credit are as important, if not more important, than the credit score itself. While bad luck with still equal penalties, you are far more likely to receive a loan if that is the case.
Getting a Loan with Bad Credit
If your bad credit is a result of bad luck, then getting a home loan is still possible. However, keep these three tips in mind in order to maximize your potential for success:
1. Save a high down payment: Cash speaks louder than words some times. If you have bad credit, but have the ability to save enough money for a large down payment (20% or more) then you show the lender that, despite past difficulties you can manage your money well and make a good loan candidate.
2. Set realistic goals: One of the biggest mistakes the home buyers made before the housing bust was spending more than they could comfortably afford to pay each month. Don't make yourself house poor - that is, spending too much of your monthly income on your mortgage.
3. Look at different lenders: Finally, know that in the realm of home loans there are many options, particularly online. Do not limit yourself to only big-name national lenders and make sure that you get quotes from several different options before making a decision.
Getting a home loan with bad credit is easier than many people think. Although there will always be penalties for the lower score, if the circumstances surrounding your bad credit are not of your doing there is a good chance that there is a home loan out there for you.
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