Home Loans with Bad Credit: Lenders risk, borrowers delight


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If you are looking to purchase a house for yourself, you must have researched through all the necessary details and the requirements of the mortgage loans. One of the typical requirements is that of a good credit score. However, if you get to know that you have a bad credit score and that too, this came as a surprise to you in the form of information from one of the lenders you applied for a mortgage loan. However, if you have a bad credit there is no need to panic. Numerous lenders out there offer mortgage loans for the people with bad credit and the trend is only increasing.

Importance of credit rating in mortgage decisions

Lenders have always paid a great emphasis on the credit score of the individuals for making underwriting decisions. Moreover, since mortgage loans are big ticket loans and they involve long term of repayment, lenders want to be sure if they are making the correct lending decision. However, there are several other factors which are more critical while considering the lending decisions. Employment status of the individuals, repaying capacity, financial status, assets under possession, debt to income ratio is some of the critical factors which offer the much needed support to the lenders that the applicants will not default. However, all these conditions are merely a way of minimizing the risk on the loans.

Meeting the eligibility

An applicant must have attained an age of 18years and be a citizen of the USA. Their repayment capacity is decided by the source of income. Lenders require that the applicants with bad credit must have a permanent source of income as an employment with a decent salary package. Individuals working with government bodies or employed by reputed employers often find it easier to grab the loans.

Down payment for the mortgage loans

Lenders generally loan 80% of the value of the property under consideration. The rest of the 20% needs to be arranged and given by the borrower before the loan is given. Thus borrowers must have good savings in order to pay the down payment. Apart from the down payment, there are several other costs associated with the mortgage lending process like the closing costs. Borrowers always have the option of getting the costs added to the total loan amount thereby saving themselves from any upfront expenses. But given the long-term of the loans, this might not be an intelligent step.

One has the option of taking personal loans with bad credit. These loans are generally short term loans and carry high interest rates. However, the interest rates applicable on personal loans with bad credit are far less when compared to the total amount which might be charged over the years under the mortgage loans. Personal loans with bad credit are generally offered in small amounts but when collateral is attached to make the loan secure, lenders often agree for larger sums equivalent to the value of the collateral. Higher value or bigger loan amount can help in meeting the pre- mortgage requirements. Personal loans with bad credit would definitely not meet the down payment requirements but they can surely cover the closing costs, valuation costs and other fee charged by the lenders.

Why loans to bad credit applicants?

There are inherent behavioral and psychological reasons behind offering loans to people with bad credit:

  • People with bad credit have suffered the disadvantages associated with the bad credit situations. For them getting small personal loans with bad credit is a daunting task and hence they would always want to pull themselves out of it by restoring their credit scores. Hence they are less likely to default.
  • Property under the mortgage can be sold to recover the loan amount if the borrower fails to repay the repay the loan taken.

So, lenders are pretty safe while lending to the borrowers with bad credit provided situations like sub-prime crisis does not resurface.

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