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High Debt Ratio Mortgage Loans

October 16th, 2009 |

Author: Gavin

Seeking Mortgage Loans for People with Bad Credit

Have bad credit but still need a mortgage? Don’t worry too much about what you know or what folks tell you because getting a mortgage is quite possible. It won’t be easy but with the proper know how, the probability of getting your application approved will increase. Subprime lenders giving mortgage loans for people with bad credit are out there..

Risk Analysis

Lending is a game of risk assessment. The risk of the borrower defaulting on a loan is always the first thing on a lender’s mind. It’s even riskier to give out mortgage loans for people with bad credit. Knowing how you are judged will help you prepare and come up with a reasonable amount to ask for. Three guidelines are usually used to determine risk. The most common is the credit score. The other less known guidelines that you have to understand are loan to value ratio (LTV) and debt to income ratio (DTI).

Credit score

Your credit score is a result of how well pay your financial obligations. Loan companies commonly think of applicants that have a credit rating of under 640 as high risk. The good news is that you have the opportunity to raise your credit rating.

Your first action should be getting your credit rating from a major credit bureau such as Experian, Equifax, and TransUnion. You ought to be able to request one report each year for free. You should definitely check it. Faults are more common than you might believe.Credit card companies could make errors when they report to credit bureaus. Right away tell the credit bureaus in the event you locate mistakes.

The most obvious way to raise your credit rating is to pay off existing debt. If you have overdue credit cards, getting them current should be sufficient enough to raise your credit rating. Other unpaid bills that you may have forgotten such as medical expenses and school loans will also pull down your credit rating, though they may not call to collect.

Understanding Loan to Value Ratio

The LTV is the ratio between the amount borrowed and the value of the property designated as collateral. It’s the total amount of the mortgage divided by the value of the property. For instance John hopes to borrow $130,000 to buy a $150,000 property. 86% is the LTV in this example. Many loaners will find it too risky to give mortgage loans for people with bad credit on an LTV above 75%. John will most likely get denied.

The Significance of Debt to Income Ratio

DTI is the ratio between the borrower’s monthly debt expenses and earnings. DTI comes in two types.. The first is known as the front-end ratio, it is the percentage of the borrower’s income every month that goes to housing expenditures. The other one is called the back end ratio. This time, it includes housing expenses plus other monthly expenses like credit card and insurance expenses. DTI is generally indicated in the form x/y where x is the front-end ratio and y is the back-end ratio. Regulation set by the FHA generally allows a DTI of 31/43, whereas subprime loan companies might welcome a DTI of 40/60 when giving mortgage loans for people with bad credit.

Let us for example take John who makes $50,000 annually. His monthly income is $4,166. Following a DTI of 31/43, John’s monthly housing payments should not exceed $1,291 and his total monthly expenditures, including consumer debt expenses, shouldn’t be more than $1,791. If he spends more every month, his application will most probably be denied.

About the Author

Corey Sunderlande is a lawyer for mortgage companies and a devoted writer. Corey Sunderlande is a personal injury lawyer for mortgage companies, and has been a hi-tech and personal finance aficionado for decades. He has published articles in various technology, gizmo, and financial websites to help share his passion for those topics. He lives in Lake Oswego, Texas, together with his wife, five children, a couple of dogs, and a honey badger