Are you eligible to get a home loan with bad credit?

Having good credit is essential if you want to buy any piece of property — or anything that is of considerable value, for that matter. It’s especially important if you plan to buy a house. However, not all of us are fortunate enough to have absolutely perfect credit records — especially if something bad has happened to you, such as a divorce, injury or business failure.

The good news is that it’s still possible to get a home loan with bad credi — you just need to know a few things, like how bad credit affects your loan application and what other options are out there for you.

How does bad credit affect your home loan?

The main effect bad credit will have on your home loan is that you will have higher interest rates and charges. Also, you might need a larger deposit of approximately 30% or more of the value of the property.

Getting a bad credit home loan: First things first

If you really plan to apply for a home loan with bad credit, here are some things you need to do first:

• Check your credit report to see if you have any credit problems.
• Compare the total cost of different mortgages — make sure you include account fees and charges.
• As much as possible, don’t make many credit applications — doing this will affect your credit rating.
• Use a price comparison site to help you see what different rates may be available to you — this way, you don’t need to spend hours online or on the phone doing your research.

Other things you can do

Here are several other things you can do when applying for a home loan with bad credit:

• Ensure that your name is included on the electoral roll.
• Always pay your bills promptly and in full.
• If you already have a credit card, make sure that bills are always fully paid. Try to use it only once a month and when you do, make sure you pay the full balance every month. If you can’t do this, at least try to pay a little more than the required amount. This will make your credit report look good.
• If you don’t have a credit card, try applying for a “secured” credit card offered by your local bank. Such cards allow you the same amount of credit as the amount you have deposited into your bank account.
• If you have any credit accounts that you don’t use anymore, by all means close them.
• Regularly check your credit report and make sure that all the information is correct. If you see any errors, get in touch with the relevant lender and ask for the errors to be corrected.
• Calculate your “loan-to-value” ratio. This is the ratio between the amount being borrowed and the value of the property being used as collateral.
• Calculate your debt-to-income ratio. Here’s what you need to do: Add together all of your debt payments, including the loan being applied for. Next, divide this number by the net cash you have each month for living expenses, after you have paid your debts. A score of around 40 percent or less will give you better odds at getting the loan.
• Apply for a bad credit home loan. It usually takes around 24 months to get your credit to an “acceptable” status, so if you don’t want to wait that long, you can seek out a bad credit home loan, also known as a subprime loan. Be warned though — such mortgages charge extremely high interest rates, so make sure you can afford the monthly payments. Subprime lenders will also need you to verify your income. You must also ensure the legitimacy of the subprime lender, since many may be out to take advantage of people with poor credit scores.

Buying a home even with bad credit is challenging but not impossible — you just need to know what your options are. What about you? Do you have any tips on how to apply for a home loan with bad credit? Feel free to share them in the comments section.