Bad Credit Loans Explained
Bad credit loans are often home loans, although they can also be commercial loans, which are made to borrowers who have subpar FICO scores or a less-than-ideal credit history. While bad credit home loans often have a high APR, typically between 10% and 15%, they can provide a borrower with an avenue to rebuild their credit and eventually refinance into a more traditional home loan.
Traditional Mortgage Loans Vs. Bad Credit Loans
Traditional mortgage loans are made through a bank or other lending institution. They often require 10-20% as a down payment, although FHA Home Loans Bad Credit require as little as 3% down payment. Traditional loans are often structured as 30 or 15 year fixed loans or 3, 5 or 7 year adjustable rate loans.
Alternatively, bad credit loans are made through private lenders or funding sources. They require greater equity in real estate, with most bad credit lenders requiring 25% - 35% after closing costs. Finally, bad credit loans are often structured as shorter term (3, 5 or 7 years) fixed rate loans.
What To Look For In a Lender
The most important factor for most borrowers is to find a loan that offers a reasonable interest rate. One of the best ways to insure a competitive rate is to shop the loan to several hard money or last resort lenders. Compare the interest rate, up front points charged, other closing costs and loan terms.
Make sure the lender specializes in bad credit loans and has a wide array of funding sources in order to find the one to best fits your scenario. Finally, use a lender that you trust and feel comfortable with. There are lots of bad ones out there, who will pressure you into accepting a loan that you can't hope to pay back, thereby assuming ownership of the property when you fail to meet the loan requirements. Try and avoid any unfair prepayment penalties so that if you can clean up that credit, you can then refinance into a more traditional home mortgage loan.
Loan To Value
Bad credit loans typically require the borrower to have 30% equity in a home or residence to be used as collateral for the loan. It's not uncommon for borrowers to ask for the value of the loan to be based on the improved value of the property, thereby greatly improving their LTV. However, most lenders will only accept improved valuation of a property with more investigation into both the borrower's financials and the property details. Lenders will often accept equity as collateral in the following types of property; residential property such as homes, condos, apartments; commercial properties such as office buildings, hotels, motels, mobile homes; and non-income properties such as foreclosures, land acquisition and bankruptcies.
Repayment And Loan Terms
Hard money loans will vary according to state, property value, strength of the borrower's financials, etc. but will typically last anywhere from 6 months to 5 years. APRs will also vary according to a borrower's collateral and financials and are often quoted by the lender and their base lending interest rate.