Applying for loans used to come down to a simple case of having a good enough income to make the repayments. Bad credit was something that damaged approval chances due to the increase of risk applicants posed. But now, bad credit does not have such a negative impact, with mortgage loans for people with bad credit commonly available.
Despite the increased risk, applying for mortgage loans is possible because there are lenders who specialize in such financial issues and offset risks these loans come with. Even though this may mean higher interest rates being paid.
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Then reality is that credit ratings relate to past facts and not to the current situation that a borrower may be in. So, mortgage approval is available, despite the perceived risks that are associated with such large loans granted to bad credit borrowers.
The Significance of the Debt-To-Income Ratio
An application for mortgage loans is not necessarily based on bad credit history, but is mostly based on the debt-to-income ratio. The ratio is a summary of the amount of debts the applicant has accumulated before making the application. So, even if applicants are carrying the burden of bad credit, their mortgage is still possible because of the dept-to-income ratio is at a health level - usually lower than 40:60.
Take for example two applicants - the first with good credit and the second with bad credit - who apply for a mortgage loan. The first has good credit but may have too many debts to be comfortably able to handle any more. Lenders will reject his application. The second, on the other hand, has a bad credit score but little existing debt. Lenders approve his application because he has sufficient excess income to cover the repayments comfortably.
The debt-to-income ratio is the key element when seeking mortgage approval. A person looking who cannot deal with the financial responsibility, regardless of their credit rating, will lose out.
Advantages
Although these loans come with high interest rates and other poor terms, these kind of loans have their advantages. One of the chief advantages is that it provides the borrower with a chance to improve their financial status and credit rating - as long as they make repayments for the mortgage loan consistently and on time.
As a result, getting approval on loans in the future will be less difficult. Not only that, but the interest rate applied and general terms improve as the credit score improves, as well as the ability to negotiate with the lender for more flexible special terms when seeking mortgage approval.
Online vs Traditional Lenders
When finding a lender, the first target are usually traditional lenders, like banks. But though they are easy to access, they are the least accommodating, with the strictest terms and conditions anyone can expect. The fact is that approvals of these kind of loans are quite low, making it not the ideal option.
However, online lenders are much more accommodating to applicants, and provide mortgage approval more readily than traditional banks. In fact, these types of loans are a specialty of lenders online, so the interest rate is extremely competitive.
Though getting a mortgage loan for people with bad credit is generally more difficult that getting a loan with excellent credit ratings, approval is certainly possible if aspects other than the credit score are favorable.
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