Although they are much harder to obtain, there are still bad credit home loans available. It used to be a very easy process to get a bad credit loan mortgage. There were guidelines set in place for every different aspect of loan approval. However, in the height of mortgage lending, for every lending guideline around, a loan program out there was offering mortgage loans for bad credit.
The main areas that are taken into consideration when getting mortgage financing are Loan to value (LTV), debt ratio (D/R), reserves, and credit history. Loan to value is the ratio of how much you are borrowing versus how much your house is worth. Debt ratio is the percentage of your monthly income that you are spending on your monthly debts. Reserves are broken down into how many months worth of the new mortgage payment worth of liquid assets you have saved up. Credit history is broken down in two different ways. The first way is by simply looking at your credit score, and the second is by looking at your last twelve months worth of payment histories.
For a very long time, the only options for mortgage finance were for people who were very strong in all four of those categories. There was no financing available for people borrowing more than 80% of the value of their home. There was no financing available for people with debt ratios higher than 41%. Almost all mortgage loans required reserves covering at least six months worth of proposed payments. Moreover, there were simply no mortgage loans for bad credit.
Nevertheless, slowly, this process changed. Lenders started lending above 80%. Banks were offering loans for borrowers with debt ratios above 50%. Minimum requirements for reserves were eliminated. In addition, many banks started offering mortgage loans for people with bad credit.
The first banks offering these bad credit home mortgage loans were the only ones doing this, and as a result started making incredible profits, simply from the huge volume of loans that they were writing. This caused literally thousands of banks to decide to become a bad credit mortgage lender. With so many banks offering these sub-prime loans, getting mortgage loans with bad credit was no problem at all. However, as all of these banks started going out of business, due to rampant foreclosures, we are only left with a few options to get a mortgage loan for bad credit.
Instead of being able to turn to the sub-prime banks that were once available, a bad credit borrower can now only turn to one place. Government loans have become the new sub-prime lending. However, while the FHA and VA programs will allow for very bad credit, the rest of the three lending guidelines are very strict.
You can still get an FHA with a sub 500 credit score, but in order to do so, you are going to have to fall within very strict guidelines for your D/R and LTV, as well as show good saving habits. Nevertheless, the hardest part now about getting approved for bad credit mortgage loans is that you are going to have to have a very good explanation as to why your credit got so bad, and more importantly, how you are going to ensure that this does not happen again.
Related posts:
- FHA Loans Are The Best Option For Mortgage Loans For Bad Credit
- A Bad Credit Home Loan Mortgage Is A Powerful Lending Tool For Increasing Your Credit Score
- What Are Your Options For Getting A Bad Credit Home Mortgage Loan?
- Mortgage Loans For People With Bad Credit Are Still Available
- Getting Mortgages With Bad Credit Is Harder Than It Once Was, But It Is Not Impossible