Bad credit mortgage loan: How to qualify for it

It goes without saying that it becomes quite difficult to qualify for a mortgage loan with a bad credit history. This is when you need to apply for a bad credit mortgage. You can go for FHA (Federal Housing Administration) and VA loans (that is guaranteed by the United States Department of Veterans Affairs), which require comparatively less credit score. However, in present situation (2009), you require a minimum of 620 score in order to qualify for these loans. If your score is lower than that, then you’ll have to look for other options. Have a look at the following lines to know how to get a bad credit mortgage.

Bad credit mortgage loan: What lenders assess

When you apply for a bad credit mortgage, lenders will assess your employment history, your credit report, your income along with your outstanding debt. Lenders actually want to assess the amount of your available cash. Therefore, if you have a good amount of cash, then you will be able to take out a mortgage loan. Moreover, the amount of your required available cash will also depend on your credit score. Even if you have a cash reserve, you may be able to qualify for a home loan; however you’ll have to make a higher down payment in such a case. This is because, if you make a comparatively higher down payment, then it is quite likely that you’ll not default on the loan since you’ve invested a substantial amount in the property.

Subprime mortgage meltdown

If you’re looking for bad credit home loan, then you can take out a subprime mortgage. However, subprime mortgage is hardly available in the present situation. This is due to the fact that bad credit mortgages have led to subprime mortgage meltdown, which has affected the US finance market for the past 2 years.

In the year 2006, lenders used to offer subprime mortgages to people with poor credit score, even below 550. Consumers were able to take out these home loans with high rates of interest as greater risk was associated with this loan. However, even if the borrowers took out subprime mortgages, they could not make the monthly payments and started defaulting on the loans, which ultimately led to several foreclosures. Moreover, the property values declined considerably and the lenders could not recover the amount that they’ve invested on the real estates. The housing market also slowed down dramatically. All these factors were responsible for subprime mortgage meltdown. As a result, lenders have stopped lending bad credit mortgage loans to people.

How to repair your bad credit

Instead of taking out a bad credit mortgage, it is always better to repair your credit in order to get a good home loan with favorable terms and conditions. You can follow these steps to repair your credit and increase your score.

• Examine your credit reports regularly and correct mistakes, if any.
• Try to repay your debts, as quickly as possible.
• Make a new budget and follow it sincerely.
• If necessary, liquidate your assets to repay your existing debts.

After you’ve repaid your loans, try to obtain a new credit card. It will help you to rebuild your credit history fast. However, make sure you manage your credit card responsibly.