Income and credit scores are not the only key to mortgage approval. If they were, then mortgage loans for people with bad credit would not be available, never mind be approved. Other factors are equally important.
Income may be an important factor in loan application assessments, and bad credit may have been so in the past, but these days neither are the considered the key factors for mortgage providers. The truth is that, however unlikely it seems, mortgage loans for people with bad credit are amongst the most commonly approved annually.
Even with a terrible credit history, we can be optimistic when applying for mortgage loans, especially when the right lender is approached. Many online lenders specialize in lending to bad credit borrowers, and have financial packages that take their situation into account. Interest rates are higher, but approval is likely.
But the key fact to remember is that credit ratings relate to the past, and with sufficiently improved finances, mortgage approval with low credit scores is very much on the cards.
The Debt-To-Income Ratio
So, what is the most important factor when applying for a mortgage loans for people with bad credit. The credit history does not reflect the current ability to pay, and a large monthly income is of little use if it is spent each month anyway. Mortgage providers, however, pay close attention to the debt-to-income ratio of the applicant.
This ratio is a summary of the debts currently on the plate of the applicant, and it is measured against their monthly income. Even for an applicant with an excellent credit history and a large income is earned, the burden of debt can be high. This directly affects the affordability of any new loan, especially a mortgage loan.
The debt-to-income ratio stands at 40:60, meaning no more than 40% of available income can be used to repay loans. The challenge then is not to get approval with low credit scores, but to get approval despite the amount of existing debt that exists.
Why Low-Income Applicants Succeed
It may seem illogical that applicants who earn a large monthly income could fail to have their application approved, while applicants with a small income could succeed. It is true that mortgage loans for people with bad credit benefit those in financial hot water, but the debt-to-income ratio has another effect.
The fact is that the ratio is the great leveler in financial terms. For example, if a good credit applicant has a monthly income of $10,000 but has monthly expenditure of $9,000, only $1,000 is excess income. With the ratio applied, only a mortgage loan requiring repayments of $400 or less per month can be approved.
But a bad credit applicant earning $3,000 per month with expenditure of just $1,500 can afford a larger mortgage requiring repayments of $600 per month. So, seeking approval with low credit scores really does not matter that much.
The Chief Advantages
Mortgage loans for people with bad credit are not the cheapest mortgages on the market due to the high interest rates that are charged. But they offer some benefits that make that compromise well worth taking.
For a start, it provides the borrower with a chance to access the funds needed to purchase the home they want. But, it also provides a bad credit borrower with a golden opportunity to improve their financial status and credit rating.
All that needs to be done is to make the mortgage loan repayments without a hitch. In the long-term, the terms of future loans will be better, and approval much easier to get. Indeed, if everything runs according to plan, then there will be more reason to seek approval with low credit scores again – with the scores raised to excellent status.