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There is no getting away from the fact that approval on any home loan, never mind a home mortgage loan with bad credit, is heavily dependent on the credit rating the applicant has. Simply put, if an applicant has a low credit score, then the chances of getting their application approved is reduced. But the rating itself is not the application killer.

Understanding how the credit scoring system works is a key element to improving the chances of getting home mortgage loans approved despite bad credit, because it is possible to take effective steps toward improving the rating.

What is important to note is that the rating is continually recalculated, and pro-active steps will have a positive effect on the calculation. So, in the end, even bad credit home mortgage loans become a far more attainable.

What is FICO?

Generally speaking, people have no real understanding of what their credit score is, or how it is calculated. So, when it comes to applying for home mortgage loans with bad credit, applicants have more uncertainty than they need to have.

FICO is one of a number of credit agencies that calculate these scores. Its full name is the Fair Isaac Corp, and while the formula they use is rather complicated, it is recognized as a fair and accurate method.

In essence, the credit score is simply a calculation designed to grade applicants based on their track record in repaying loans. Lenders can use this score to assess the level of risk involved in lending to a particular borrower, something that is particularly useful to them in the case of assessing a bad credit home mortgage loan application, for example.

However, understanding what is important in the calculation is the best way to prepare the right application, and so all but guaranteeing getting home mortgage loans approved despite bad credit.

Two Important Factors

Even if the calculation is quite complicated, the two most significant factors in the equation are the payment history and the asset-to-debt ratio that the applicant has. If both of these factors are not too bad, then the rating is good and the chances of getting a home mortgage loan with bad credit are greatly improved.

The payment history relates to any late payments made on loans in the past, which migtht suggest that repayments on a bad credit home mortgage loan may not be received on time. However, any more serious cases, such as defaults, foreclosures and bankruptcy rulings are also taken into account.

The asset-to-debt ratio relates to the amount an applicant owns compared to the amount they owe. It is not simply a matter of how much excess income is available, something most believe is enough to get home mortgage loans approved despite bad credit. In fact, it is more closely related to the amount of existing debt, compared to available income, with debt matching 60% of total asset value a preferred limit.

Steps Towards Improvement

There are four main steps that can be taken to improve your chances of having an application for a home mortgage loan with bad credit approved.

Firstly, consolidating all of the existing debts though one loan, and secondly, showing that an effort has been made to rebuild a credit status, even after bankruptcy. When seeking a bad credit home mortgage loan these can convince the lender that every effort is being made to commit to such a long-term loan.

More basic steps towards getting home mortgage loans approved despite bad credit are seeking advice from a credit counselor and preparing a precise and detailed budget. But as long as lenders see that an effort is being made, the influence of a credit rating is lessened and the chances of a getting a home mortgage loan with bad credit is greatly improved.