How to Get a Loan with Bad Credit
If you find yourself with less than a sterling credit rating, you would not be alone. The 2008 recession resulted in many people having taken on loans that they could not afford to pay back or even keep up the payments. The resultant market crash left credit score scars on many borrowers. However, the market is of course aware that many people post the crash do not have the requisite credit scores to be able to acquire loans from the traditional sources or by the traditional standards.
The government specifically created and recently expanded existing loan programs designed to help individuals and small businesses to grow in spite of past credit mistakes. The business programs for government and commercial loans often focus on the future value of the endeavor and the future ability to pay.
These types of loans are evaluated based on the value of what the loan is spent on; what product or service or material item it will produce and the market value of that outcome. If it is a personal loan, it will be based on the recent employment record and future salary potential of the borrower as a means to measure the ability to repay. Most frequently those personal loans require that the borrower secure the loan by leveraging some asset if the borrower has bad credit.
How to Get Residential Real Estate Loans and Home Loans with Bad Credit
Government Programs: Increasing Homeownership for Low and Middle Income Citizens
Most banks will not consider extending a home loan through their own loan programs to people with credit rating that is less than good or excellent. The commercial rates for housing loans are irrelevant because those loan rates are only offered to those with sterling credit.
The government created these programs to fill in a gap with bank lending. They work to guarantee those home loans so that banks would be willing to do business with people who did not necessarily have the economic wherewithal to justify the loan.
The business of trading and securitizing mortgages that took place in the early part of this century turned the housing market into a commodity with very little oversight on the part of the government. Home loans as a business took off and the number of “lending institutions” rose dramatically. Loans were pitched and given to people with little regard for their ability to repay the loan.
This led to the 2008 crash, which meant that all the money that people had paid into their houses was lost when they could not keep up with the payments. The use of teaser rates and adjustable interest rates caused all sorts of people to default on their mortgages, and every defaulting individual had their credit rating destroyed in the process.
The government particularly steps up to the task of providing affordable housing options as a safety net against the real estate market’s fluctuations and larger macroeconomic forces like depressions and recessions. The poor and the credit damaged as well as particular groups of individuals whose identity characterizes them as a class of people who disproportionately have been disadvantaged in the housing market are specifically targeted by government programs designed to secure housing loans for them.
These programs are a great source of help to the credit damaged borrower, since they focus their acceptance on the recent past and future earning power of the individual rather than their past failure to pay debts. These loan programs recognize that the cash for a down payment can also be a problem for folks in these financial straits. Most of them offer some method of either gifting the down payment from a relative or co-owner or rolling the down payment into the larger body of the loan, effectively eliminating the need to cover those up from costs.
HUD Loans and FHA Loans
Housing and Urban Development is the umbrella agency that houses the Federal Housing Authority and as such all home loans that are government guaranteed are both HUD and FHA loans. These types of mortgages are federally insured programs designed to provide affordable housing options to first-time homebuyers and low-to-moderate-income borrowers who may not be able to qualify for a conventional mortgage. There are various types of FHA or HUD loan programs available to potential homebuyers, including fixed rate, adjustable rate, graduated payment, long term options and reverse mortgages.
When it comes to income qualification criteria for an FHA loan, no specific income minimum or credit score is required, but borrowers should be able to provide a 3% down payment and demonstrate a steady employment and income history for the past two years. The biggest benefit of FHA loans is that their more flexible finance terms, less strict credit standards, and lower down payment requirements and closing costs allow borrowers unable to qualify for traditional mortgage loans to start buying instead of renting. The structure is similar to the Veterans Administration loans that waive all down payments for veterans and their families, although these loans require 3% down.
FHA loans allow a maximum loan to value ratio (LTV) of 96.5% on a 1-2 unit property, the down payment may be comprised of all gift funds with non-occupying co-borrowers is allowed. Loans can be used in conjunction with eligible government down payment assistance programs, but property must be owner-occupied. These loans are not meant to be for investment properties; rather they were designed to provide primary residences for the borrower.
Veterans Administration and Native Americans Home Loans
VA home loans through either the Veterans Administration or the Bureau of Indian Affairs allow the borrower to roll the cost of the down payment over to the overall life of the loan, freeing the borrower to use their savings toward closing costs and other expenses connected to shifting your private residence. The VA has several specialized loan programs as well; there is a specific direct loan program for Native American veterans, service people and their families.
There is also a specific loan program for veterans who seek a primary residence purchase in what is considered a rural area. The Specially Adapted Housing (SAH) program offers grants to certain service members and veterans with severe service-connected disabilities to assist them in building, remodeling, or purchasing an adapted home. Longer term options are available to make payments more affordable.
The Office of Loan Guarantee within HUD’s Office of Native American Programs’ guarantees are for 100% of the loan and are designed to make banks look more favorably on the candidate, especially those with little or no credit.
United States Department of Agriculture Loans
(USDA) rural development loans are designed to help medium income Americans buy a home in rural and suburban communities. Also known as Rural Development Loans (RDL) these loans offer many advantages to clients who are interested in purchasing real estate in a rural or suburban town with a population of less than 20,000.
For example, they require no down payment, are available for reduced interest rates, and are guaranteed by the government. USDA loans can allow flexible credit standards, somewhat controlled by the bank who is the intermediary. Furthermore, there is a mechanism to roll closing costs into the loan, spreading it out over the monthly payments. In order to be eligible for many USDA loans, household income must meet certain guidelines.
The Nature of Government Loans
For some government loans, your credit score or credit history is totally irrelevant, like the Veterans Administration home loans. Banks will often offer these government options to customers of limited means to help them achieve their financing and to provide the bank with a guarantee for 80% – 100% of the loan.
The government sets standards for the borrowers of all of their loan products and banks benefit greatly from being the primary lender in the process. Some banks and lending institutions will offer the service of preparing your loan application for free so that they can receive the government’s guarantee that the bulk of the loan will be backed up by government money.
If you can qualify because you are a veteran, family member of a veteran, Native American, or of a certain financial status, these loan programs have potential as a source of financing since they are designed to help people who cannot meet traditional credit score requirements.
Fannie Mae Loans or the Federal National Mortgage Association loans are the product of a government-private entity designed to help encourage banks and lending institutions to provide loans for low and middle-income people. They accomplish this by expanding the secondary mortgage market.
Creating and selling MBS (mortgage backed securities) allows lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations or smaller entities that cannot offer good terms to those without the requisite credit rating. These types of loans are more regulated in some ways today than they were pre-2008, but it is very important to assess your own ability to repay the loan rather than just accepting the lender’s advice.
How to Get Personal and Individual Loans with Bad Credit
For those with a credit “past,” the most effective and cheapest way to receive individual or personal loans from banks or lending institutions is to secure the loan by providing an asset as collateral. This type of loan is less about your ability to repay the loan through your own responsible behavior – the lender is less concerned with your past credit record for the same reason.
The secured loan is a loan that the lender is absolutely sure will be repaid. By seizing and either keeping or selling the borrower’s collateral in the face of default, the lender is assured of repayment in one form or another. The unsecured loan is called a signature loan and is usually based on a credit history that speaks to the borrower’s ability to repay the loan and almost always offers better interest rates and terms than the secured loan.
Securing Your Personal Loan with Your Home as Your Asset
The largest asset most people have to offer for security is the equity they have in their homes. One way to get a personal loan is to use the payments they have already made on their home to borrow money. These types of loans require that the borrower own a minimum percentage of equity in their home. The remainder owed can even be reduced in the process of a refinancing, as well as lowering monthly payments. The lender then extends the cash to the borrower and is usually completely uninterested in how the money is to be spent.
Refinancing is not a free process, and often has many costs associated with procuring the loan. For example, most refinancing loans require a home inspection and a professional appraisal. Depending on your geographic location, this can cost up to $1,000.00 upfront to the borrower without the assurance that they will eventually be approved for the loan.
Some lending institutions insist on providing the inspector or the appraiser, which can lead to a collusive relationship between that lender and the appraiser. Many institutions also charge high fees for the closing of such a loan, and those expenses are not always accurately represented before the process starts.
For most people, the most effective institution to get a personal loan from is a bank or credit union that you already have a business relationship with; like where your checking account is housed. They are already familiar with your financial situation and condition, so there is less administrative work to be done to assess your creditworthiness.
For example, if you are looking to refinance your home to get some cash to pay medical bills, the bank that holds your mortgage has already done the bulk of the assessment process and can evaluate your ability to pay the house loan back with less effort and theoretically without charging you as much for the administrative process of setting up the loan.
Many institutions have their own underwriting services inhouse, so the terms and conditions that they consider are more flexible than they would be if they outsourced those assessments.
Fast Loans and Furious Financing: Lending Institutions that Focus on Asset Secured Loans
Many lending businesses have entered the market in the last twenty years by providing secured loans on items like cars and even future paychecks. For example, there are payday loan companies that will provide a borrower with a percentage of their upcoming paycheck for a fee and interest on the loan. Late fees and minimum payment charges quickly make the loan a lot bigger and empower the company to take the collateral.
For example, if you borrow against your future paycheck and end up in default, the company now has grounds to attempt to garnish your wages and take them before you earn them, along with any interest, fees, late charges or any other cost like the attorney’s fees for bringing the action. The loan contract may empower them to put a lien on your house or other assets, restricting your ability to borrow against or sell the asset until the debt to this lender is paid.
These terms are spelled out in the contract, but are often expressed in legalese and are difficult for a layperson to appreciate their potential. Much like criminals never expect to get caught, borrowers usually are expecting to pay back the loan. Many people in the United States today are in credit trouble because of medical expenses, which represent a large chunk of the total debt held by Americans. The fact that such expenses are completely unpredictable mean that even the most well-intentioned borrower can get in trouble.
The appeal associated with asset based lending institutions is that you can get a fast loan rather than wade through a lot of paperwork and wait for the institution to decide if you are a good risk. Of course, with the security of your automobile or your paycheck, the lender has little reason not to act quickly – they are covered by your securitized asset from a loss.
These companies are appealing to people in emergent situations who need a quick loan to prevent further financial damage. They often claim that you will have the cash in hand within twenty-four hours and may even refer to their financial products as “emergency” loans. Many people either do not read the fine print or do not understand its implications. Some people feel that they simply have no choice but to accept the terms because of the urgency of their situation.
Acquiring a Bill Consolidation Loan
A third and probably more common means of acquiring a personal loan with bad credit is to consolidate your bills into a single monthly payment and lower your interest rates by acquiring a bill consolidation loan. In a sentence, debt consolidation is the process of taking out one large loan to pay off multiple, smaller loans. The key idea is to combine — or consolidate — several loans with different terms into one loan, hopefully with more favorable terms.
Obviously most of the people who seek this type of loan are already in credit trouble. Most lending institutions that handle bill consolidation and debt consolidation loans are prepared to be lenient about your credit history. They are much more interested in your long term earning potential as a measure of your ability to pay back the loan, or the value of the collateral you put up to secure the loan.
This financial product is ideal for someone with a bad credit history but a good employment history. In turn, taking out such a loan should repair some of the damage done to your credit by helping you avoid late or missed payments that result from the terms of your current loans.
Some personal loans are assessed in relation to the task associated with the loan; for example, home improvement loans. The fact that your bank also holds the mortgage on your house helps them want to provide you with the money to make that asset more valuable. The terms for home improvement loans are usually more generous to the borrower than other personal loans.
Of course, even Home Depot offers a home improvement loan, so the number of institutions willing to lend money toward this pursuit is large. When the loan provider is a commercial entity, credit scores and credit ratings are often the only factor used to determine which people get these loans.
For homeowners who already own their houses outright but are cash poor, reverse mortgages are also a source of personal loans based in an asset’s future value to the lender. Reverse mortgages essentially set up a payment process where the bank buys your home back in installment payments
How to Get Business Loans with Bad Credit
Research shows that traditional banks are still stringent in their lending practices and reject over 40% of small business owners who apply for loans. Banks turn down many businesses because they use a rigid set of guidelines that usually require multiple years in business, a high FICO score, assets and a high loan amount.
Under these conditions, it is hard to imagine any small business owner with bad credit getting a loan. In the face of these odds, the government has once again stepped in to provide small business loans for people with limited means or damaged credit.
Programs and Purposes of Small Business Administration Loans
The two major SBA partnership loans are the 7(a)-loan program and the 504-loan program. The 7(a) program requires security but offers business expense loans for equipment, office furniture, former business debts or real estate loans with variable rates for up to 25-year terms. The 504-unsecured loan program focuses on real estate and machinery funding.
The 504 loans include job creation requirements. Manufacturers, for example, must create or retain one new job for each $100,000 of the loan, while all other industries must create or retain one new job for each $65,000 of the CDC 504 loan. The process of applying for these loans will take at least 30 days at best, so they are not necessarily good for emergency situations or cash flow issues.
SBA defines a small business for the 7(a) program by certain size standards. These include limitations based on sales or number of employees depending upon the industry classification of the business. For example, in the manufacturing industry the number of employees can be a maximum of 250 to 1,500 depending upon the industry code (SIC). The wholesale industry cannot exceed 100 employees.
Most service/retail oriented business cannot exceed a range of $30.0 million per year in sales which can be averaged over the past three years. There are exceptions dependent upon the type of business.
Special SBA Program for Credit Challenged Applicants
The SBA Express loans are for businesses with damaged or unproven credit that want to improve cash flow, refinance debt, or fund improvements, equipment, or real estate. It features the easiest SBA application process and accelerated approval times, plus it offers longer terms and lower down payment requirements than conventional loans.
Not every bank offers such loans so it is important to make sure that the lending institution that you will employ can help you apply for such a loan. It is a relatively new program and the structure of the loan is supposed to require a lot less paperwork and administrative hassle than traditional SBA loans. The SBA Express Loan program was created after the 2008 crash in recognition of the number of people who had their credit rating trashed.
The duration of SBA loans varies in and among the types of loans. Most of the programs have maximum terms but few dictate the term uniformly. The SBA 7(a) can be anywhere from three years to twenty-five years, depending on the type of business expense the loan is intended to purchase. Since the 504 is designed to property or equipment, it can range all the way up to twenty-five years as well.
Small Business Loans from Alternative Lending Institutions
Many business owners are turning to alternative lending options and steering clear of banks and their exceedingly high loan qualifications. However, most online lenders are brokers that auction your application to the highest bidder, leaving you with unanswered questions and unknown responsibilities.
The internet is full of lending institutions that offer to give small businesses big money in the form of fast loans. They are pitching themselves as the alternative to traditional bank loans. They are willing to accept inventory collateral, real estate or even future credit card earnings as the source of repayment and as such don’t care about your previous credit history.
This is no different than any other security based loan except that the company that brokers the loan is probably not the company you will end up dealing with in relation to any complications or issues you may have with your loan down the road
HUD’s Role in Providing Financing for Low Income Housing Development
Sometimes, government loans are given in the interest of supporting a certain industry or sector of the economy. In those instances, the government often provides either incentives or gives breaks to people willing to invest their effort toward a public good. The Housing and Urban Development Agency is responsible for developing low cost housing options for lower income citizens. They do this on several levels. The main one is for them to subsidize the creation of low income housing. In doing so, the government offers to HUD loan money to developers at a lower interest rate and under better terms if they are willing to build low income housing, as well as providing lower standards for credit scores.
These terms are offered to offset the developers’ loss of the potential value of the housing they are developing. The government either offers the loan directly or through a commercial lending institution. This is the way that government theoretically tries to make sure that low income housing is available and that financing for that housing can be offered at reasonable rates and terms to people with bad credit histories.
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How to Get School Loans with Bad Credit
The best way to get financial aid to go to school is with federally guaranteed school loans. They have low interest rates, long term durations that allow the student to pay them back with lower installment payments and theoretically less stress financially. These loans are available to students that have good credit and have demonstrated the ability to pay back the loan, or have managed to get a cosigner for the loan who meets the bank’s credit score requirements. Unfortunately, if you already have a bad credit history those programs will not be available to you through private banks.
In the interest of providing educational opportunities to students without the means to pay, the government has created loan programs that allow students with bad credit or no credit history to have a government guaranteed loan if they can prove their financial need. These loans are funded by the federal government and are easy to apply for, comparatively speaking.
No matter what your credit score is, you will be eligible as long as you demonstrate a need for financial help. These loans are need-based and require no credit check. A few of the most popular federal student loans available include the Perkins loan, Direct loan, GradPLUS loan, and Parent PLUS loan.
Some of these loans require your parents to provide their tax returns and financial information for several years back from the loan application. If your parents are claiming you as a dependent, it will be their financial status that will be evaluated, not yours. Even if your parents are refusing to help pay for your schooling, if they claim you as a dependent their financial status will be the basis for the loan application.
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How to Get Vehicle Loans with Bad Credit
Getting a loan for a vehicle is something that is best accomplished through your regular financial institution. The terms will probably be better through them than some of the other options listed below, if you have an asset to secure the loan. Otherwise, these loans are usually subject to credit score standards that you are unlikely to be able to meet.
Many of the retail businesses that sell vehicles offer motorcycle loans, boat loans, mobile home loans or used car loans provide financing without any credit check. That is because they will evaluate your ability to repay the loan by asking for proof of a steady income. The length of time that you have been employed at the same job is occasionally a consideration.
The interest rates offered without regard to credit history are usually pretty high. Sometimes you can get them to agree to a low interest rate in the bartering process by offering to put a larger down payment on the loan, so that less is being borrowed. These loans can be very shady: much like the discussion above about home loans, the contractual requirements of such an agreement are often in legalese and designed to benefit the borrower. There is little risk for them if they can repossess whatever vehicle you have purchased two years into the loan when you miss one payment or have a check bounce or some other accidental occurrence.
Preparing to Borrow and Assessing Your Own Financial Situation
The market provides all sorts of options for all types of loans, usually with some consideration for the borrower with bad credit, complete with conditions and usually penalties. Some government and commercial loan programs are not available without the required credit score. Ultimately there is a price to be paid for bad credit when borrowing, usually in the form of providing either security for the loan or absorbing a higher cost to get the loan in the form of higher interest payments. However, with a careful eye on your ability to repay, you can find a way to acquire financing for almost any endeavor that produces a marketable value.
The cost of many of these loan options may be prohibitively high, so looking for different ways and means to qualify for financing is a productive pursuit. Cleaning up your credit, leveraging assets, achieving predictable employment, consolidating debt and ultimately raising your credit score is helpful towards achieving loan qualification and acceptance by broadening the scope of your borrowing options. The chance of getting a fair loan contract with a bad credit history is tricky but achievable.
Getting Free Financial Advice and Guidance for Finding Loans
There are many nonprofit credit services available to people with bad credit who are interested in borrowing money. Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management, and budgeting. They discuss your entire financial situation with you, and help you develop a personalized plan to deal with your money problems.
An initial counseling session typically lasts an hour, with an offer of follow-up sessions. They are very helpful in preparing for the loan application process as well as guiding borrowers through the field of options available to folks with bad credit. They can provide financial planning advice and explain the details of any loan you are considering. Most importantly, you can bring any loan contract to them before signing it and have them give you an unbiased and expert opinion on the consequences of choosing either a bank loan or a government backed loan. Any nonprofit credit organization that asks you to pay them before they render services is not a good choice.
When it comes to housing, the contract to buy a house is a complicated legal document. There are lawyers who specialize only the process of closing a home loan, so the degree of complexity is not to be taken lightly. Government attempts to regulate bank behavior around these contracts have not reduced the need for a vigilance on the part of the borrower.
For example, the APR (Annual Percentage Rate) is designed to present the actual cost of obtaining financing, by requiring that some, but not all, closing fees are included in the APR calculation of your home loan. These fees in addition to the interest rate determine the estimated cost of financing over the full term of the loan. This requirement that the APR include most of the loan’s costs is a regulation created in response to the 2008 credit crisis.
Since most people do not keep the mortgage for the entire loan term, it may be misleading to spread the effect of some of these upfront costs over the entire loan term. Many companies that do lending do not articulate all of the upfront costs of the loan. Any company, bank or lending institution that will not tell you all of the fees and service charges associated with your loan should be avoided. Very few banks or lending institutions are thorough in their description of their charges for their services.
Another type of loan that requires vigilance and attention to detail is the refinance loan or personal loans based on securitized assets. The cost of the loan will include appraisals and inspections that can be very costly and are not explained as part of the process of refinancing or borrowing. The terms of the contract often include the conditions under which the lending institution can seize the asset in response to a breach in the contract by the borrower.
This is best seen when examining payday loans or auto title loans. The loan is never for the full value of the asset it is securing it and one late payment could mean that the borrower essentially sold their asset to the lender for a ridiculously low price. Such a contract is similar to going to a pawn shop to hock your grandmother’s ring: they can’t give you what it is worth and if you don’t manage to pay the loan back in time they get your grandmother’s ring for half of its worth.
These examples demonstrate why it is so important to do as much research as you can, particularly when it comes to individuals with bad credit. However, with careful planning, patience, and an abundance of caution, it is possible to find a loan to improve your situation.