Securing the finances needed to purchase a new home is not easy in these times of financial difficulty. The risk involved in taking on such a large debt is perceived to be higher now than it was a decade ago, but this has not seemed to affect the availability of mortgage loans for people with bad credit histories.
The fact is that getting loan approval, regardless of the purpose and size of the loan, is never simple. There is clear criteria that must be met, but with so many approvals, it is clear there is a route to take to improve approval chances.
In fact, there are three reasons why approvals despite bad credit histories is so common: the growth of the online lending industry; the fact that applicants are getting their finances in order; and the realization that the debt-to-income ratio is all-important. Once these three aspects are addressed, approval on mortgage loans is more likely for everyone.
Influence of Online Lenders
The rise of the online lending industry has made a huge difference to the availability of mortgage loans for people with bad credit. It might seem strange, but online lending firms are specialists in bad credit lending. So, applicants with low credit scores are more likely to get the best deal in practically every kind of loan package, including mortgages.
There are definitely risks involved, so the interest rates charged are higher than usually, but are nonetheless lower than comparative loans from traditional lenders, like banks. Still, getting loan approval relies on proving a sufficient income and a working bank account, into which the lender can deposit the funds and withdraw monthly repayments automatically.
Perhaps more significant is the fact that the criteria associated with online mortgage loans is less complex and more streamline, and as such the number of applications approved are higher.
Getting the Key Areas of Preparation Right
Conditions like the debt-to-income ratio are key to having loans approved. And it is thanks to prior knowledge and better preparation that there has been a rise in approvals of mortgage loans for people with bad credit. But this ratio in particular makes a huge difference.
This is because the debt-to-income ratio has little to do with credit ratings and everything to do with numbers. Quite simply, it confirms whether there is enough excess income to cover a mortgage repayment comfortably or not. In line with the 40:60 ratio, if 40% of the excess income can cover the repayment then getting loan approval is almost certain.
What this means is that even applicants with excellent credit ratings can see their application for a mortgage loan rejected. An applicant with even a terrible rating, but with low existing debt, is much more likely to get the thumbs up.
A part of the preparation for an application is getting everything in order. The last thing that a lender wants to see is a chaotic financial situation when examining an application. Taking proactive steps have meant that mortgage loans for people with bad credit histories are much more attainable.
One of the most common steps is to take out a series of small short-term loans in an effort to improve that credit history. What this essentially means is that loans of as little as ,000 are taken out and repaid very quickly. With each loan cleared, the credit score improves. After four or five such loans, the score can improve considerably. With this, the chances of getting loan approval also improves.
Of course, this does not set a strong case, but it does show that the applicant is very serious about taking on the expense of a mortgage loan. Even if the credit score remains low, the significance of these efforts does not go unnoticed.