Much is made of the fact that bad credit can be detrimental when it comes to buying a home. Traditional lenders like banks would have us believe we don’t stand a chance, but options do exist. In fact, there are mortgage loans specially formulated for people with bad credit.
Many of these mortgages are available through online lenders, whose loan packages are more affordable and involve fewer fees and even charge interest rates. But perhaps most crucial is the fact that credit scores don’t factor into the application process, ensuring a better chance of approval.
For almost everyone, a home loan is the largest single personal debt they will take on, which explains the nervousness with which many approach them. But there are some secrets to preparing an application that can help improve your chances of approval.
Be proactive about your credit score
This is most useful when applied to traditional lenders in particular, who generally place great importance on scores when evaluating applications and the interest rate to be charged. While it’s true that home loans for people with bad credit are already well structured, improving your credit score a bit can make the deal even better.
The most common proactive step is to take out a small personal loan, pay it off smoothly, bump your score up a bit, and thus ensure a better chance of approval when it comes to the mortgage. A series of small loans, such as payday loans, means this can be done multiple times over a given period, perhaps 5 or 6 $1,000 loans over 12 months.
With each approved loan, your credit score improves, which in turn improves the terms of a home loan. However, this tactic requires some time and patience.
Make a large down payment
Making a larger down payment than is necessary sends the message that an applicant is serious about taking on such a large debt. The importance of such a move is even more poignant when it comes to home loans for people with bad credit.
The reason is twofold. First, the size of the mortgage is reduced because more of the purchase price is paid. A 5% down payment on a property worth $250,000 only reduces the mortgage to $237,500. But a 20% down payment brings that down to $200,000. Unsurprisingly, the result is a much higher probability of approval.
Second, if a 20% ($50,000) down payment is made, then the financial discipline needed to save that lump sum cannot be ignored. Lenders are only too happy to make a home loan to someone so committed.
Think outside the box
Finally, thinking outside the box can result in more creative funding that will dramatically improve the robustness of the application. Being a person with bad credit does not guarantee approval of a bad credit home loan.
Creative financing can see the mortgage amount broken down into individual loans that can not only result in a better chance of approval, but also a reduction in overall debt. For example, after a 10% down payment, the required mortgage amount is $225,000. This could be borrowed through a $200,000 mortgage over 30 years and a $25,000 personal loan over 3 years.
Although the size of the home mortgage loan is reduced, the personal loan payments may be lower than the mortgage payments. So the monthly payments of $600 will take the pressure off for the first 3 years before the mortgage payments begin, which can be as high as $1,200.
