Generally speaking, there are two types of home loan borrowers: prime and sub prime. A borrower with a good credit rating and low debt, and he is diligent about paying his bills on time, he will be considered a prime borrower.
On the other hand, a borrower with a bad credit score, extened debt and who always pays his bills in a tardy manner is a sub prime borrower. As a general rule, a credit rating of under 660, with a debt to equity ratio of over 50% and two or more late payments in the last year, will mark a sub prime mortgage candidate.
Some borrowers, even if they possess good credit ratings and low debt (although this is unlikely) will be considered a sub-prime borrower if they declared bankruptcy in the previous 5 years.
The risk a lender takes on a loan is factored into the pricing of the loan, so sub prime borrowers have to pay a higher interest rate.
Since there have been so many foreclosures of sub prime mortgages over the last year, lenders are becoming stricter regarding lending to sub prime borrowers.
If a borrower wants to improve his chances, the first thing he should do is try to improve his credit score. Bringing down the size of debt and being diligent about paying bills will show a lender that recent credit history has improved.
The borrower should make sure to keep all records so that he can show the bank the recent history.
One situation where a borrower can have little to no hope of getting a new home loan is the situation where the outstanding balance on a home loan exceeds the current market value of the underlying property.
A good first step to take is to talk to a mortgage consultant who has a lot of experience. Such a broker may find avenues the borrower may not have considered, as well as advise him how to his credit, and what other steps he may want to take to qualify for a loan.
A good broker will also have the nerve to tell a borrower that his case is very poor and he will not receive a loan.
Disreputable brokers may ignore these facts, and go ahead with an application even if there is no chance of it being approved, just to collect the application fee.
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