Bad credit scores can be a curse when it comes to accessing loan funds. Many lenders shy away from those with very poor credit ratings, preferring to avoid high-risk borrowers so as to reduce the chance of losing money. But it is still possible to get a homeowner loan with bad credit.
The reasons for low credit scores are numerous.It may be down to loan defaults, arrears on repayments, or perhaps due to county court judgments. But the result is the same: the terms and conditions of any loan are far from perfect. Therefore, securing loan approval is more difficult.
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With a homeowner loan, lenders take a more open view of applications. This is especially the case, when the homeowner has equity on their home to provide as security - though there are also unsecured versions available too. But what are the key facts to bear in mind before applying?
Secured Homeowner Loans
The best option when applying for a homeowner loan with bad credit is to provide some security. The reason is simply because the lender is provided something as compensation should the loan be defaulted upon. This means the risk of loss is reduced dramatically.
The key advantage for applicants is that this helps to makes securing loan approval a lot easier. However, with the risk of losses so much less, the interest rate charged is reduced also. So, the monthly repayments become more affordable too.
Not only that, but it becomes possible to get larger sums of money with a secured homeowner loan, and with a loan term that is longer. This also means that the size of the monthly repayments is kept low, so the borrower is sure of the most affordable loan deal possible.
Unsecured Homeowner Loans
When applying for an unsecured homeowner loan with bad credit, the process and criteria are quite similar to those of normal loans. The only difference is that this loan is open to those who have little or no property, like long-term tenants and lease-holders.
Given that no security is offered, securing loan approval is dependent on income and credit scores alone. But this also means that the degree of risk the lender is accepting is greater. Therefore, interest rates are higher and, usually, the loan limit is significantly lower.
Debt-to-income ratio is the central point though, with applicants needing to have a low amount of debt compared to income in order to ensure the ratio is safely within the set 40:60 rate. Even with a large income, failing to keep repayments within 40% of excess income guarantees the homeowner loan is rejected.
Advantages of a Homeowner Loan
Again, there is a difference between secured and unsecured homeowner loans, with bad credit ratings having a far bigger influence in the case of the latter. But there are still advantages to enjoy in both cases. Not least is the fact that debt consolidation can be achieved.
In fact, when secured loans are granted, they can be quite large. Equity on a home can be as much as $100,000, and even more depending on the amount of mortgage that has already been repaid. Securing loan approval is easier, even for large sums, thus making it possible to effectively clear debts in one go.
When it comes to unsecured homeowner loans, tenants and leaseholders are given an avenue to financing that would normally be closed off. Although the interest rates are much higher, the tenant history is taken into account, lessening the impact of bad credit scores.
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