Securing A Mortgage Loan With Bad Credit: 3 Essential Steps to Approval

The whole process of applying for a mortgage loan with bad credit lingering is strewn with uncertainty. At least, that is typically the feeling of the applicants themselves. But there is reason to have greater confidence.

The task of securing approval from lenders is made easier when three key aspects are addressed properly in advance. There are, after all, more important factors involved in the approval process than a credit score.

These three important aspects relate to the employment of the applicant, the saving of a large down payment and the commitment the mortgage loan applicant has shown to improving their situation.

1. Reliable Employment

Income is certainly important, but regardless of how much is earned, it is the reliability of the employment an applicant has that is of more interest to lenders. Being able to prove employment is especially important for those applying for mortgage loans with bad credit.

The fact is that securing approval from lenders rests in essence on the ability of prove that repayments will be made without a hitch, and that the lenders will get their money back. This is why applicants who have only started a new job benefit little, even if their income is quite good.

Lenders usually include in their criteria a minimum employment history of 6 months in the job, and sometimes a letter from employers, as proof that it is a long-term appointment. At best, this indicates the position is full-time, thereby making a commitment to repaying a mortgage loan viable.

2. Signs of Credit Score Improvement

The significance of a credit score may be limited, but there is a lot to say for applicants that are visibly making efforts to improve theirs. When seeking a mortgage loan with bad credit, providing evidence to suggest that the bad credit rating has or will be improved on, is highly valuable. This is because the lender understands that situations can change and the circumstances that contributed to a low score can be overcome.

All that is needed to improve the chances of securing approval from lenders is to take some proactive steps, like taking out a consolidating loan to better control existing debt and lower monthly repayments. Or perhaps to take out a series of small personal loans to repay quickly and improve the score directly.

However, even if these moves fail to make any real impact on a credit score, the fact that efforts are being made is a pleasing to lenders. It tells them that the applicant is prepared to commit to the mortgage loan and make a concerted effort not to miss repayments.

3. Provide a Large Down Payment

While taking proactive steps may be important, the most proactive move is clearly saving a large down payment. When it comes to people applying for a mortgage loan with bad credit, having $10,000 or $20,000 to hand to make a down payment is hugely impressive.

The reason is two-fold. Firstly, the larger the down payment the more significantly the required mortgage sum will be reduced. For example, a property worth $200,000 needs a loan of $180,000 if a 10% down payment is made. The risk is therefore lessened, so securing approval from lenders is more likely.

The other aspect is that the degree of financial discipline required to save a large sum, like $20,000, is exactly the type of discipline that those funding a mortgage loan want to see. That kind of money cannot be saved with a frivolous attitude, so lenders are confident they can trust the borrower.

Loans With Bad Credit – Rejection Is No Mystery, There Are Reasons

It is only logical that when applying for a loan with bad credit, there is a chance that the application will be rejected. We know that there are always options, and the bad credit scores alone are not enough to rule out getting a loan. However, any rejection is based on sound reasons, and by knowing them, it is possible to know how best to avoid disappointment.

The simple fact of the matter is that there is set criteria which an applicant has to meet before a loan is approved. Therefore, any rejection of loans is based on not matching the criteria. We already know that lenders are willing to grant loans despite bad credit, so it is a matter of providing a convincing application.

This is where knowledge of the required criteria is of value to an applicant, helping them to know what is possible, what limit to the sum requested is most acceptable and what terms to expect. Here are some reasons why a loan application is rejected.

Credit Rating is Too Low

Logically, a bad credit rating should automatically qualify an applicant for a loan with bad credit, but it is not actually as straight forward as that. It is possible that a credit rating is simply too low for the lender to feel any confidence that the loan will be repaid. If a poor attitude towards repayment is indicated in credit histories, then rejection of loans is more likely the result.

Of course, failure to repay can sometimes be out of our hands, with perhaps a loss of a job or an unforeseen financial crisis the reason behind a default. It might also be that the score, though low, is an improvement on previous years, with a concerted effort to improve a rating evident in the credit history. In these cases, a lender might feel happier about approving a loan despite bad credit ratings.

No History

Strangely, having no credit history can actually be a negative thing. This is a problem that many first time loan applicants have, and while it may not be a factor when it comes to getting a loan with bad credit, since there is no credit history to rate as bad, there is an uncertainty over their ability to pay.

The best way around this issue is to seek a small, short term loan that can be easily repaid, thereby establishing a record quickly and without much pressure. Of course, even to get that kind of loan, it is necessary to have a bank account and a history of paying utility bills, at least.

It is important to remember that the rejection of loans is based on risk, nothing else. Therefore, convincing the lender to approve the loan, despite bad credit or no history, comes down to proving an ability to pay.

Proving Ability to Pay

This is the crux of the application for a loan with bad credit. And while a bank account and a history of paying bills both show an ability and tendency to pay, there is also the need to prove that this will remain the case in the future. Proof of income then is also important, which may lead to a lender asking for a salary slip, and a failure to do so is often the basis of a rejection of loans.

Collateral is also a very useful aspect of an application, with any security serving to ease lender fears. The fact that must be considered is that loans with bad credit, especially in these times of economic uncertainty, will be rejected unless the necessary criteria is met.