New Mexico has one of the highest bankruptcy rates in the nation. Never again obtaining a home mortgage loan consistently surfaces as the primary fear of people considering bankruptcy. Luckily, those searching for a home mortgage loan will find that within one day after their bankruptcy discharge home loan financing will indeed be available to them. Within the mortgage business lending to borrowers with very, very bad credit including bankruptcy and foreclosure can go by several names including the sub-prime market, b,c,d credit lending or simply bad credit home loans. The wonderful side of this industry for debtors is the fact that it exists. On the other hand individuals with bad credit must understand that what will be expected from them and that what will be available for them in the sub-prime mortgage market bares little resemblance to the type of home mortgage loan available to a borrower with perfect credit.

Credit Score

Before attempting to obtain a home mortgage loan, borrowers should first understand exactly where they stand from a credit point of view. Lenders categorize borrowers using two systems. The first mirrors standard grades used in school. Borrowers' credit will be evaluated and given a grade, where A is the best, B will be credit showing a bit of tarnish, C represents fairly bad credit, D means very bad credit, occasionally I've even seen some F's. I have included a chart estimating where someone's credit will fit into this system. Remember that humans evaluate most of these credit reports, with the result that some credit evaluators will assign different grades to the same borrowers and that some lenders may assign more or less importance to certain types of negative items on a credit report.

The next type of scoring model more closely resembles an SAT score, with 800 being near perfect and 400 approaching as bad as it gets. These scores carry names such as FICO, Beacon or Empirica; each of these names corresponds to one of the particular major credit reporting agencies. The exact mathematical formulas used to calculate these scores remain proprietary information of the credit bureaus, computers use the formulas to establish a credit score. It is safe to say, however, that the same negative items which would affect a letter grading system also negatively affects the numeric scoring systems. You may use the Equifax link on the mortgage tools page to get a copy of your credit report online including your FICO score. For more information I have written an article on credit repair and credit rebuilding.

Loan-to-Value Ratio

The next important concept in calculating loan eligibility would be the ratio between the amount being borrowed and value of the property being placed as collateral. The common name of this ratio is "loan-to-value" or LTV. Easy examples include: A borrower qualifying for an 80% LTV loan buying a $100,000 house could obtain a loan for $80,000; refinancing a $200,000 house at 70% LTV would mean a $140,000 mortgage. Borrowers should note that the value used for this calculation on new purchases would almost always have to be the lower of the purchase price or the appraised value. With a refinance, provided that the home owner has been in the property for a long enough period of time (usually six months to a year) appraised value only may be used in the loan to value calculation. This distinction can be a problem in certain cases such as when a borrower has brought a home truly worth $100,000 at auction for $60,000.00. The home may actually appraise for $100,000 but the purchase price of only $60,000.00 must be used resulting in a greatly diminished availability of funds for the purchase. Money needed exceeding the mortgage usually comes from a cash down payment. When the loan available due to the LTV limitations for the borrower yields too little to buy the home in question owner financing, family help or a down payment grant can sometimes bridge the gap. In many D credit cases the lender requires at least 5% must be put down even though the sale may not necessitate it. In budgeting a transaction do not forget to include closing fees. When LTV issues prevent a refinance some debt workout options may help. Provided the borrower qualifies for the loan based on their credit score and loan to value requirements the next hurdle will be a review of the debt to income ratio.

Debt-to-Income Ratio

 Calculate the debt to income ratio by adding together all of the borrower's debt payments, including not only the loan being applied for but also any auto loans, consumer debt, credit cards etc, etc; divide this number by the net cash available each month available to the borrower for living expenses as well as debt. Most lenders would prefer this ratio to be approximately 40% or less; in fact, to obtain certain low interest loans a low DTI would be a requirement. In the sub-prime market lenders will also allow more flexibility to the debt to income ratio allowing the percentage to climb as high as 55 to 60%. As with the other parameters, flexibility abounds in sub-prime lending. On the other hand, the borrower pays for these flexibility's in the form of a higher interest rate.