Securing Mortgage Loans with Bad Credit: What Lenders Look Out For

Usually, the chances of getting mortgage loans with bad credit might seem pretty slim. The average home loan is over $150,000, which a substantial amount of money. So, having a poor record in repaying loans on time is only going to make lenders nervous about the chances of avoiding a default.But the good news is that bad credit status does not rule out a mortgage completely. There are online lenders that are more open to applicants with low credit scores making it possible to get approval with poor credit history. All that the applicant needs to do is meet the criteria that is set out by the lenders, and to accept a few compromises.The biggest compromise is the fact that interest rates charged on a mortgage loan is going to be high. But for those whose lives have already been affected by bad credit scores, there is at least a chance of get the funds needed to buy a home.Meet Basic CriteriaThe starting point for anyone seeking mortgage loans with bad credit is to meet the basic criteria that lenders set. These criteria relate to age, residence status and proof of income. Only after these conditions have been confirmed will lenders even consider the finer details of the application.All applicants must be over the age of 18, a stipulation that is laid down by law. They must also be either a citizen of the US, or have a long-term residency visa that proves they are living and working in the US legally. Finally, applicants need to show that he or she has a reliable source of income, especially if they are to get approval with poor credit history.If the lender is satisfied, then details like the debt-to-income ratio and affordability of the mortgage loan repayments can be looked at. However, beyond setting the interest rate, the influence of a bad credit rating is very small.Debt-to-Income RatioLenders use bad credit scores to work out interest rates. For example, an excellent score of 700 will see a low interest rate charged, while a poor score, like 620, will mean a higher one is charged. Securing mortgage loans with bad credit gets more difficult the lower the score is.However, even more significant is the debt-to-income ratio, which relates to the amount of income free to cover the loan repayments. The ratio is set at 40:60, which means that no more than 40% of income can be used to repay loans. Getting loan approval with poor credit history is possible if this ratio is adhered to.If the repayments on the mortgage loan look set to push the rate over 40%, then it is a good idea to set about lowering the existing debt. This can be done by taking out a consolidation loan, and with each debt cleared, the credit score improves. As a result, the interest rate is lowered, helping to make the repayments more affordable.Large Down PaymentAnother hugely useful move ahead of applying for a mortgage loan with bad credit is to offer a larger down payment than usual. It is normal to offer around 5% of the purchase price, which lowers the size of the required mortgage. For example, for a home worth $200,000, a mortgage of $190,000 is needed. However, 10% sees the required sum fall to $180,000, and 20% fall to $160,000.As the required sum falls, the chances of securing loan approval with poor credit history are increased. The interest falls and the monthly repayments fall. Also, and remember that even a saving of $100 per month translates to savings totally $36,000 over the lifetime of a 30-year mortgage loan.