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Bad Credit Lending

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Bad credit is a problem that many people face. If you have filed for bankruptcy or been marked for nonpayment (delinquency) on any debt for 60 days of the last two years or 30 days of the last year, chances are you’re going to have difficulty securing a standard home loan. There’s no reason to get down on yourself, though; financial mishaps can happen to anyone. However, it’s important for you to know that you’re going to have to work a little harder to get the home loan you need. This guide will give you a little more information on lending for those with poor credit.

Lending Options

If you have bad credit, you are by no means out of options. Remember, though, that none of these options are ideal, but they may be necessary for those with bad credit. Look into all of your options carefully before deciding which route to go.

  • Credit unions: A credit union, as opposed to a bank, is owned by its members and operated by an elected board of directors. While banks tend to look just at the numbers, a credit union may be more willing to look at you as an individual.

  • Peer-to-peer lending: Instead of borrowing from a bank or loan company, you may be able to borrow directly from an individual. Again, as with a credit union, an individual may be more willing to listen to your story. Still, he or she isn’t looking to lose his or her money, so this isn’t a sure-fire option. You can search online for peer-to-peer lending websites.
  • Co-signer: Getting some one to co-sign your loan may help you qualify for a loan you couldn’t qualify for on your own. When someone co-signs a loan, he or she becomes partly accountable for the loan. If you were to default, the responsibility of repaying the loan would fall to the co-signer. Since this is a big responsibility, you probably won’t be able to get just anyone to co-sign your loan. Stick to asking close friends or family members.

  • Friends & family: You may be able to find a friend or family member who is willing to give you a loan directly (rather than co-signing).

  • Collateral: If you have something of value (like equity in your home), you may be able to borrow against it. Basically, whatever your collateral is acts like insurance on your loan, making it possible for you to get one. However, this means that, should you default on the loan, you risk losing the antique grandfather clock or priceless artwork you put up as collateral.
Making use of one of these methods may secure a loan for you, but it’s likely that the terms of the loan will much less than ideal. You’ll probably at least face a fairly high interest rate, but you won’t know for sure until you start looking around.

Credit Repair

The best way for you to get a good loan is to have good credit. If you can delay your home purchase for a while, you can use that extra time to improve your credit score. Then, when you do go to get a loan, you’ll have a much easier time securing a favorable one.

To fix your credit score, you’ll first need to figure out what’s wrong. Get a copy of your credit report to see what areas you’ll need to work on. You may get the best picture by requesting a credit report from more than one credit bureau. Here are some suggestions for cleaning up your credit:

  • If your credit report is inaccurate, you can have it fixed. Contact the credit bureau that issued your credit report to find out how to file a dispute.

  • Get current on any delinquent accounts you may have.

  • Start paying off your debts. This is no small task, but it will do the most to improve your credit. You may need to make cutbacks on your lifestyle to make this possible.

  • Don’t close any accounts unless you’re sure that doing so won’t negatively impact your credit.

  • Talk to your creditors about your desire to improve your credit. They might have programs in place that will help you reduce your monthly payments in times of hardship.
Improving your credit isn’t simple or quick, so be patient. If you’re really overwhelmed or don’t know what to do, it may be worth it to look into professional help like consumer credit counseling from organizations like the National Foundation for Credit Counseling.

TIP: If you have low income, you might consider using private mortgage insurance. See our guide on the subject for more information.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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