What is a Bad Credit Lender?
BAD CREDIT LENDER - A bad credit lender specializes in helping those with Low FICO scores (below 620) qualify and secure loans. Bad credit lenders mainly help borrowers with :
- Purchasing homes
- Home refinance
- Purchasing autos
- Securing credit cards
Typically, the trade-off for a bad credit lender processing your loan is high interest rates and other fees.
What Is Considered Bad Credit?
Below are the most common items that constitute bad credit - when a lender runs a credit application the any credit flaws below will be revealed.
- Your FICO score is 620 or lower
- 2 or more 30 day delinquencies on any payment
- 1 60 day deliquency on any payment
- If your debt to income ratio is 50%
- If you have filed for bankruptcy in the past 5 years
- If you a have foreclosure on your record in the last 12 months
Good News - Credit Score Isn't the Only Factor When Applying for a Bad Credit Mortgage
The mortgage lending industry by and large, will approve or disapprove your loan based on statistical models, which have proven a strong relationship between your FICO score, your LTV (loan-to-value, which is how much down payment you put towards the home) and rates of default among borrowers.
Borrowers with poor credit scores applying for home loans with little or no money down are statistically more likely to default on home loans and declare foreclosure.
Therefore the industry tends to favor Automated Underwriting or AU , because of its predictability. AU takes any guesswork out of the loan approval process and instantly and objectively approves or disapproves loans for potential borrowers based on credit scores.
So why would lenders give loans to bad credit borrowers?
Approving only "A " paper loans is not possible anymore, the number of applicants with below 680 FICO scores is staggering. Lenders see the profit potential in the bad credit market.
Clearly, a completely automated credit approval system cannot service the many bad credit borrowers that are looking to purchase homes, cars, and other lines of credit.
The good news for bad credit borrowers is the credit industry knows not all low FICO score candidates are going to default on home loans. It is worth the time of the brokerage industry to manually process bad credit applictions and approve a portion that would never make the grade via AU.
So, because your credit score is below 680 AU is not an option for your loan, therefore, the bad credit lender will manually examine your entire financial situation and look for offseting factors and manually approve your mortgage loan.
Weighing other personal financial factors like your income and current debt ratio will definitely factor into the final interest rate and terms you are you are offered.
FHA loans are quickly becoming a viable choice for those with damaged credit - FHA home loan - bad credit can qualify
Bad Credit Can Be Equalized With Offsetting Factors
For example, say your credit score is poor, below 650, however your landlord reports you HAVE NOT missed a rent payment in the last 3 years.
That's a thumbs up for your credit-worthiness.. Just because on-time rent payment information is generally not included in your FICO score, it most definitely can prove your credit-worthiness.
Increasing Income - Previous Bad Credit
This may be you. Maybe you had late payments in the past because of low income - and late credit card payments stay on your credit history for 7 years. But what happens when your income has gone up because of a promotion or perhaps a spouse begins working ?
Your FICO score will still report the late payments, however, you now have a higher debt to income ratio and if you've made all your payments recently, your risk assesment will be lower.
Bad Credit Loans are In Demand
A bad credit lender, especially a bad credit home loan mortgage originator, considers your loan a profitable commodity! I can't stress that enough. They WANT YOUR BUSINESS and will compete with other brokers.
If you are considering accepting the first mortgage quote you are offered you will be making a big mistake. It is critical to shop at least 3 quotes before accepting a bad credit loan.
Why bad credit borrowers get lousy rates on mortgage loans
Bad credit borrowers just don't shop - therefore they get lousy mortgage interest rates. Let's be realistic, if you have a 575 credit score don't expect the best rate. However, bad credit borrowers just need to put in extra effort when seeking a loan.
If you are not shopping your loan with at least 3 bad credit lenders EXPECT to pay more in fees and receive a higher interest rate.
By not shopping 3 bad credit lenders you are setting yourself up for "excessive points", "yield spread premium", and "high origination fees".
A few trends with bad credit borrowers...
BAD CREDIT BORROWERS EXPECT HIGH INTEREST RATES - Bad credit borrowers don't shop for mortgage quotes as much as those with credit scores in the 700's and above. And this has been proven.
As a bad credit borrower, you may already be anticipating a higher interest rate . Lenders know this and meet little resistance when quoting higher rates to bad credit borrowers, so they'll see how high they can go.
If you're a bad credit borrower you may have been led to believe you deserve a high fee - high interest rate. loan This is a BIG MYTH...You can always do better if you know how to negotiate.
MORTGAGE BROKERS KNOW BAD CREDIT BORROWERS DON'T SHOP - an experienced bad credit lender knows most bad credit borrowers don't shop and count on borrowers being uninformed as well!
**By not making the brokers compete for your business, you incur higher fees and higher interest rates, plain and simple - ask and you shall receive!
FEES ARE NEGOTIABLE - Believe it or not, origination fees and your final interest rate is VERY negotiable - many bad credit lenders include filler and junk fees which are basically PURE PROFIT for them.
If you don't know these 4 basic ways to negotiate a lower mortgage (and these are very simple concepts) then you will pay too much for your mortgage loan.
A bad credit lender, especially bad credit home loan mortgage brokers, considers your loan a profitable commodity! I can't stress that enough. They want your business because profit margins are high for bad credit loans and will compete with other brokers to fund your loan.
FHA Loans could be the "only loan" for bad credit borrowers
The recent mortgage meltdown has created a revival in FHA loans.
This is great news for many borrowers because an FHA loan may be the perfect loan for you if you have bad credit and little down payment.
In fact it may be the only way to afford the home you want!
If you've had any sort of missed payments on auto, credit or mortgage in the last couple years, qualifying for a conventional loan will be ridicuously expensive.
With the recent flood of foreclosures into the market, lenders are not handing out NO DOC, LOW DOC, 100% and finance loans any more.
Unless you are an "A" credit risk (700 plus) expect high interest rates and 10% to 20% downpayment to even be considered by a conventional lender.
So why consider an FHA loan?
Easy credit requirements and low down payment
First, there is no minimum FICO credit score required.
The lender will run a routine credit history with Equifax, Experian, and Trans Union to see what your credit score is - if your married the lender will use the highest middle score of you or your spouse to establish a baseline credit profile.
Don't worry too much about this...
FHA is more interested in your overall bill paying trend rather than tallying up all your missed payments when making a loan approval. So if you can explain why you missed a payment or two, you should be ok. Ideally, you should have no more than 2 missed payments in 24 months.
Another big plus is you only need 3% of the sales price of the home. Compare with 10% or 20% with a conventional loan.
These two factors make FHA a great choice for bad credit borrowers who may be able to afford payments but don't have a huge down payment.