Bad Credit Borrowing Options
If you have bad credit, you have probably had a difficult time locating financing for purchase, large or small.
Lending requirements in the United States tend to be very strict. Even if you have a single blemish on your credit file, most large banks will deny you the credit you seek.
A visitor once wrote us saying he had a median credit score of 700, and despite the fact that he had over $25,000 saved in his (unmentioned) bank, the bank denied his request for a credit card!
Unless you own a home and can use the home as collateral, options are limited. Various loan options include, refinance home loan, first time buyers and new home purchases, payday loans, cash advance second mortgage, home equity loan, refinancing mortgage, home mortgage loans, home equity loans for home improvements, and various credit card products you will need to make sure you are fully aware of what your credit says about you. Dangers of unsecured loans and credit cards
I have a large amount of bad debt, especially student loan debt. How should I consolidate this debt and prioritize my payments?
We recommend that secured debts be first priority. This includes your home and your car. If you are still a student, your loans are deferred and will be for three years after you graduate. If you have student loans that are due, you can request a forebarance from the lender, if you are having financial difficulties. For more information on debt consolidation options, visit our consolidate debt page.
How much do you need for a down payment on your new home purchase?
In the past, lenders usually required a down payment of at least 20 percent of the purchase price of a home. Now, the amount of your down payment will depend on factors, such as the amount of money you have saved for your home purchase, your current financial situation, your credit history, and your feelings toward other investment options.
Can you get a low down payment mortgage if I have bad credit?
Today, many lenders are approving bad debt loans with lower down payments. In addition, certain private and government entities have low down payment programs. Typically, the lower your credit rating or FICO scores, the higher you will pay in interest. You may also be required to put more down.
Bad Credit FHA mortgages
You may be able to get a Federal Housing Administration (FHA) mortgage with a down payment of as little as 3 percent. Qualification standards are relatively lenient for FHA mortgages, and the terms of these mortgages are generally very attractive, making them ideal for first-time homebuyers. Keep in mind, however, that FHA loans require borrowers to pay mortgage insurance premiums.
Bad Credit VA mortgages
Department of Veterans Affairs (VA) mortgages are another low down payment option. VA mortgages are available to qualified veterans and their surviving spouses. VA mortgage terms are also generally very attractive, and in many cases, little or no down payment is required.
Bad Credit Conventional mortgages
You may be able to obtain a conventional mortgage with a down payment of less than 20 percent with the help of private mortgage insurance (PMI). Low down payment mortgages are somewhat risky for lenders, because they believe you are more likely to default on a loan in which you have very little invested. For this reason, lenders generally require PMI if you are borrowing more than 80 percent of the value of the home you are purchasing (i.e., your down payment is less than 20 percent). If you are concerned about taking on PMI payments, keep in mind that you may not have to pay PMI forever.
For loans originated after July 29, 1999, your lender is obligated to cancel your PMI once you have reached 22 percent equity in your home, provided you have a good payment history. Or, you can petition your lender to remove the PMI if you have a good payment history and reach 20 percent equity in your home.If you don't have at least 20 percent for a down payment, consider asking if your lender would be willing to increase your mortgage interest rate a quarter of a point rather than require PMI coverage. Your monthly payment will increase by roughly the same amount as the monthly insurance premium. However, mortgage interest is generally tax deductible; PMI payments are not.
Another alternative to PMI is to obtain 80-10-10 financing, where a lender provides a traditional 80 percent first mortgage, and you then obtain a 10 percent 2nd mortgage and make a 10 percent down payment.
What about larger down payments?
If you have more than 20 percent to put down, you may still want to take the time to weigh your down payment options. With a larger down payment, you will reduce the amount of your mortgage and thus the amount of interest you will pay. And since a larger down payment usually means less risk, lenders often offer lower interest rates and are more lenient toward borrowers who provide larger down payments. Also, a larger down payment gives you instant equity in your home, which can be accessed through a home equity loan or home equity line of credit.
Keep in mind, however, that there may be situations where you might not want to make a large down payment. For example, you may want to keep the money in your emergency cash reserve. Or, you may want to put the money toward other investment opportunities.
What about mortgages that don't require a down payment? Some lenders offer "no down payment" or "100 percent financing" bad credit mortgage programs. However, these programs typically have high interest rates and closing costs, along with additional qualification requirements.
Investing money for a down payment
If you're saving for a down payment, you may be wondering where you should invest your money. The answer depends on how soon you'll need the money, since the more time you have, the more risk you may be willing to accept in considering investments. If you're going to need the down payment within the next few years, you'll probably want to minimize risk. For many, this means a bank savings account. However, you'll also want to consider money market accounts as well. Money market accounts are low-risk, and generally pay slightly higher interest rates than bank savings accounts.
Bad Credit Borrowing Options...Benefits and Dangers.
Believe it or now, there are many many people in the United States today who have never taken out a loan, made a purchase on credit, or owned a credit card. They believe that if you can't pay cash, you can't afford it and shouldn't buy it. One thing is certain: Bill collectors will never bother these people. What these people know is that you can get into financial difficulty if you borrow too much, too frequently. However, what these people seem to misunderstand is this: It is frequently beneficial, or at least convenient, to make purchases using someone else's money. If you are thinking about borrowing money, and you are new to the world of credit, you should know about some of the benefits and dangers of borrowing.
What are the benefits of borrowing money?
Successful borrowing can help you create a positive credit history. A positive credit history is important for many reasons. Even if you do not believe in making purchases on credit, it is good to have the ability to do so. In the event of an emergency, it is good to have access to emergency funds. Unless you have adequate liquid savings, you will need to borrow money to handle an emergency. To do so, you will need a positive credit history.
Credit is also desirable when making major purchases. Saving up the money to buy a house may take many years, and you will have to pay rent while waiting. If you have a positive credit history, you can buy a home and obtain a mortgage loan to buy the house, pay off the mortgage over 15 or 30 years, and live in the house while you're doing it. If you wish to use credit to help yourself in these situations, then you must establish a good credit history. You do so by borrowing. Only by borrowing, and paying off your loans as agreed, do you establish a good credit rating and make the easy acquisition of credit possible. Keep balances on unsecured lines and credit cards at or less than 30% of the available balance.Borrowing is a convenient way to make purchases Without considering all the financial variables, borrowing is just plain convenient. Credit cards are the most convenient form of borrowing.
You can buy your lunch, buy a movie ticket and popcorn, buy stamps at the post office, make a long-distance phone call from a pay phone, buy groceries, get gasoline, book a trip to Aruba, get your teeth cleaned at the dentist, and order a CD, all without going to the bank, writing a check, or digging in your pockets for change. Credit cards are so widely accepted that it seems only a matter of time before they will replace cash entirely. If you carry a no-annual-fee credit card, and you pay the card off in full every month, then you pay no interest on the borrowing. The convenience is free. If you have bad / poor credit or have no credit history estabilished, you may begin with a secured credit card. This actually a great way to begin establishing credit as a student. With secured lines, you can learn to manage the debt and payments. Your positive payment history is reported to the credit bureaus (Experian Transunion Equifax) and your credit file is started.
Interest on some forms of borrowing is tax deductible
If you have equity in your home and the ability to borrow, you may be able to benefit from tax-deductible interest. If you have major expenses or other high-interest debt, you can take out a home equity loan or line of credit (HELOC) and pay off or refinance the debt. In most cases, the interest on such loans is tax deductible, making the cost of funds cheaper.
What are the dangers of borrowing money?
Overspending is a risk when credit is readily available, especially if you have poor credit. When credit cards and home equity lines of credit are readily available, it is easy to overspend. A shopping trip can quickly turn into a no-holds-barred, bare-fisted spending spree, leaving your credit cards and equity lines tapped out. This may not be a problem if you can afford to pay the bill at the end of the month. All too often, however, consumers don't realize how much they have actually spent until they get the bill in the mail. Overspending can cause you to default on payment, thereby hurting your credit standing. You may begin to see 30 day slow pays appearing on your credit file, followed by 60 day lates. This can continue as long as you are unable to make timely payments as a result of being in over your head. So, use your money wisely. Spend thriftly. Other loans such as payday deferred check deposits (pay day loans) can be dangerous if you aren't careful. These short term loans can be very helpful if you need immediate cash, to pay for unexpected expenses. But you can quickly find yourself living on these advances from paycheck to paycheck, paying very high intrest in the long run. Simply exercise caution.