How Mortgage Loans For Bad Credit Borrowers Can Exist, And Be Viable

It almost seems mysterious that bad credit borrowers can possibly be granted a large enough sum of money to buy a home. Surely, lenders would steer clear of granting mortgage loans for bad credit borrowers, purely based on the unimpressive credit history of the applicants. But in fact, lending such sums to such applicants is not the risk it seems.Making these loans available to bad credit borrowers is not as crazy as it seems. Lenders very carefully assess the affordability of every loan application, and given that mortgage assessments can take anything from 60 days to 90 days, they are clearly sure of their decision when they give someone seeking approval with low credit scores the green light.But what does this mean to the borrowers themselves? And are the terms offered as affordable as many mortgage providers testify they are. After all, securing a mortgage loan means taking on a very large debt and committing to it for perhaps three decades.Why Credit Scores Can Be IgnoredWell, in fact, they are not completely ignored, but they are certainly not the debilitating factor that many people seem to think. A credit score is recognized by lenders as only being a value reflecting the credit history of an applicant, but not their current financial stability. So, offering mortgage loans for bad credit applicants is not the risk it seems.However, the scores do have an influence when it comes to deciding on the interest rates to charge. The lower the score an applicant has, the higher the interest rate bracket they fall into. To this extent, the affordability can be affected, with approval with low credit scores essentially meaning higher monthly repayments.To that extent, it is worthwhile for applicants to invest some time into improving their credit scores. Simply get a copy of your credit report to find out your official score, then look at where the weaknesses lie. It is also possible to get the score reviewed before applying for the mortgage loan, correcting any miscalculation there may be.Affordability Is The key ConcernWhile so many people connect credit scores with affordability, the connection is not actually as close as is generally thought. Affordability rests on issues of income and the extent of existing debt. Basically, if there is insufficient excess income, then a lender will not approve a mortgage loan for bad credit applicants.Another key part of establishing affordability is the debt-to-income ratio, which stipulates that a maximum 40% of excess income be made available to make the repayments. It means that even if the excess income is $1,000, no more than $400 can be committed to the mortgage loan repayments.So, even if it is possible to secure approval with low credit scores, the issue of having ample cash to make the necessary repayments is far more important.Where To ApplyOf course, finding lenders that offer mortgage loans for bad credit applicants can be a challenge too – especially when competitive terms are needed. While most traditional mortgage providers are ruled out because of their poor terms, subprime lenders are worth approaching.Subprime lenders are famed for their higher-than-average interest rates, but they have an advantage over other sources in that approval with low credit scores is more likely. This is because they target this niche area, and are experts in bad credit lending.However, they are also viable because they offer longer mortgage loan terms, which means that the size of the monthly repayment is kept very low – and therefore very affordable. The result is that they are ideal for bad credit applicants, particularly those with scores of less than 620.