How Do Bad Credit Loans Work?
If you have never established credit, have bad credit, or have faced bankruptcy, you might wrongly fear
that you will never be able to buy your own home. Actually, it might even be possible for you to buy a
home within one day of facing bankruptcy, because of a type of loan called bad credit loans, subprime
loans, or b, c, and d credit lending. The loan you would obtain would be different than for someone
with good credit, however, and some lenders do take advantage of those with bad credit seeking to buy
a house. There are also government programs to help those with bad credit who are seeking to buy a
You would also need to be aware that you might be required to put down a higher down payment when
buying, than if you would have good credit. In addition, the interest rate you would pay might be
higher than for those with good credit.
Have a look at Bad Credit Loans
First, you should check with a lender. Lenders report that some potential borrowers wrongly think their
credit is too bad to get a loan to buy a home, and the lenders actually consider their credit fine for
lending purposes. On the other hand, some borrowers are unaware that their credit is as bad as it is and
are surprised when they have trouble obtaining a loan.
It would first pay to understand your credit score. Lenders use two systems to rate credit. Under one
system, a potential borrower would be given a score with a letter grade, under which, F represents
credit as bad as it can get; D is for those with very bad credit; C is for those with fairly bad credit; B is
for those with credit with some problems; and A is for those who have the best credit.
Under the other type of scoring, someone is given a numerical score similar to a SAT score. Under that
system, 800 is for those with excellent credit, and 400 is as bad as possible. The three major credit
reporting bureaus assign the scores such names as FICO score, Beacon, or Empirica, and each agency
has its own system to determine creditworthiness. The scores would also affect any letter grades for
Next in deciding whether a potential buyer would qualify for a loan would be the ratio between the
amount being borrowed and the value of the property being placed as collateral, or Loan to Value
(LTV). For example, someone obtaining a 70% LTV loan and wanting to buy a $200,000 home could
get a loan for $140,000. If someone is seeking to refinance a home instead, only the appraised value
may be considered.
If an LTV loan would not be enough for the house, it might be possible to get help from a family
member or a down payment grant.
The debt to income ratio is also used to determine whether some qualifies for a loan by adding all the
borrower's debt payments, such as not only the loan being applied for but auto loans, consumer debt,
and credit cards. This number is divided by the net cash available in a month. Most lenders would like
that number to be 40% or less, and for some loans that would be a requirement. Some sub-prime
lenders, however, will allow the number to be as high as 55% to 60%. Such flexibility in obtaining a
loan, however, will result in a higher interest rate on monthly payments.
Those with bad credit can expect to pay more points, more interest, and a higher down payment. Some
lenders will try to take advantage of those with good credit, however. You should not enter into such an
agreement, if you have good credit.