Bad credit has similar consequences on all kind of loans. However, home loans for people with bad credit do have some differences that need to be clarified. The loan terms on home loans are influenced by different variables and the credit situation of the applicant is just one of them. As opposed to unsecured loans, credit score doesn't have such important influence on home loans.
The Collateral Factor
Using a property as collateral has many advantages when it comes to bad credit loans. Mainly because the consequences of bad credit are counteracted by the guarantee of repayment that collateral represents. The doubts that the lender may have due to the high risk that lending to someone with bad credit represents, soon fade away as soon as you can offer an asset as collateral for the loan.
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When offering security you'll be able to obtain better loan terms on your bad credit loans. You can easily get lower interest rates, higher loan amounts, lower monthly payments and more flexible repayment programs. These benefits are seldom obtained by applying for unsecured bad credit loans due to the high risk involved for the lender.
As to the loan amount, it will depend on the amount of available equity you have on your property. Equity is determined by subtracting the amount of money owed that the property is guaranteeing (mortgage, liens, etc.) to the market price of the property. If you have a $100,000 property and your outstanding mortgage balance is $60,000, then you have $40,000 worth of available equity on your home.
If you are planning to purchase a home and you have bad credit, the property will still act as collateral for the loan but you'll be required to meet certain harsh income requirements and you'll have to face higher interest rates. Also, you may be required to offer a down payment or a co-signer in order to get approved for a home loan with bad credit.
Down Payment or Co-Signer
A down payment will increase your chances of getting approved for a bad credit home loan. Not all lenders will require a down payment for approval, but saving money for a down payment shows to the lender your income capacity and your financial discipline. Thus, offering a down payment will definitely imply a good impression.
Also, if your credit score is too bad, you can always request a loan with a co-signer. The co-signer is also responsible for the repayment of the loan in case you fail to meet the monthly payments and thus, the risk for the lender is greatly reduced. Offering a co-signer will then also increase your chances of getting approved for a bad credit home loan.
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