For most people, applying for a mortgage loan to buy a house is
one of the biggest and the toughest lifetime financial exercise.
It gets even more difficult for those who have had a bad credit
history. Even though people with bad credit are at a
disadvantage, lenders do recognize their financial problems and
needs and offer them mortgage deals that might not be the best
but which at least provide them with an opportunity to own a
In order to get the best possible mortgage options, a borrower
has to impress upon a lender that in spite of a bad past, he is
financially responsible. To convince the lender of your
credibility, the foremost thing to do before applying for a
mortgage loan is to start clearing the red flags that mark your
credit report. Begin by reducing your credit card debts as much
as possible. Similarly pay off other debts like car loans or
auto debts, particularly if they have more than 9 monthly
installments left, since auto debts with less than 9 payments
are generally excluded from debt calculations.
The next best thing to do is start saving big for a good size
down payment on your home. Since you fall in the bad risk
category for a lender, the bigger the down payment, the more it
assures the lender of being able to recover his cash in the
event of a future default. Do remember to include closing costs
when saving for your down payment as they can add as much as 3%
to the purchase price. Overall, saving more than 20% of the
total purchase price should improve your credibility.
The borrower should target and reduce his monthly liabilities to
less than 50% of his total income in order to give confidence to
the lender about his ability to repay his mortgage loan without
any defaults. It is never to late to get into better financial
habits, like reducing the use of credit cards and postponing
large purchases. At this point of time, it is wise to hold on to
your present job and not make any unnecessary jumps. A steady
employment of over two years adds to your image as a consistent
and stable person.
Lenders will go through your bank statements to figure out your
expenses and incomes. Any unusual entry may raise question
marks. If a friend or family member gifts you money to help you
purchase your house, make sure the lender know it is a gift and
not another loan. Reveal all your liquid and cash reserves that
you own since lenders judge your paying capacity from them and
generally prefer that they have at least two month's reserve of
the monthly mortgage payments.
Last but not the least, even factors like prompt payment of
house rents, phone bills, insurance premiums and other financial
bills add to your credit worthiness. Finally, even after you
have spruced up your credit image, make sure to approach more
than one lender and compare their lending terms and conditions
in order to get the best mortgage loan.
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