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If you have made some mistakes in the past as far as your credit is concerned, brace yourself for the facts about bad credit loans. You should first try to assess just how bad your credit is before you hit the panic button though. Very often, bad credit items that appear on your credit report can be challenged and sometimes removed. In addition, mistakes on your credit report can have an adverse effect on your credit score, shunting you into the category of a high credit risk. Items that are good news for you but do not show up on your credit report (or on one or the other of the credit reporting bureaus’ file on your credit history), can cost you some valuable points. Last, but not least, taking bad advice from well-intentioned relatives or friends can lower your credit score, making you a candidate for bad credit loans.

Bad news first

Let’s look at these possibilities for improving your credit rating one at a time. But first, let’s get the hard core issues out of the way. If you have had bad credit issues in the past and know you have made some wrong choices that may have landed you in bankruptcy or wage garnishment, it will be almost impossible to fix your situation in the short term. Medical emergencies have unavoidable consequences as well but none of these means you will not be able to find a lender of last resort.

If you are reading this you are probably at the point where you have decided to turn around your spiraling credit history, but know for sure that this will take time and will cost you money. Bad credit lenders will equate you with high risk and assign a high interest rate to whatever type of loan you are seeking in order to offset some of the risk that you may not pay back their loan on time.

Bad credit car loan

Let’s say you are in the market for a car. You will be required to make a hefty down payment on a bad credit car loan. I have heard of down payment requirements as high as $3,000 but that is not the only problem you face. Your interest rate on a bad credit car loan may range from 19% on the low end to as high as 29% on the top end. A high-mileage used car could end up costing you $400.00 or more per month in monthly payments. To minimize the damage from these high rates, I would suggest you start by calling several lenders. They usually both sell and finance the product on the spot. If you can find one whose maximum interest rate is in the low twenties you may be able to save a substantial amount of interest payments. You must make sure though, that they report your payment history to the credit bureaus as this will help to improve your credit score provided you pay on time.

Bad credit personal loan

Bad credit personal loans are issued by a variety of sources. Here again their emphasis will be on charging you a high interest rate to cover the risk of your defaulting on the loan. Payday loans are an example of bad credit personal loans that carry enormously high rates of interest as they are calculated over a short time span and are designed to get you to the next paycheck.

Other types of personal loans include equity-backed loans. Let’s say you have a home or some other asset that is almost or fully paid off. Local and regional banks or home equity specialists will lend you money using your asset as collateral. Although a loan of that nature will be safer for the lending institution, your past credit history will force you into a bracket paying somewhere around 21%, despite the use of your collateral.

Bad credit mortgage loan

This is the big ticket item that will cost you dearly over the life of the loan. Consumers with credit scores above 650 may find themselves paying say, six percent on their mortgage loan, depending on the prevailing interest rates at the time of their purchase. If you have bad credit, you should be prepared to pay two and a half to three percentage points more and sometimes into double figures on your mortgage rate. Depending on the prevailing economic circumstances you may find it very difficult to get a mortgage at any rate. You can expect that any lender looking at your loan application will expect you to have a substantial down payment in hand, ranging from 10% to 20% of the value of the home you are trying to purchase.

Not only should you expect to face a high interest rate, but also, your lender will require you to purchase private mortgage insurance to cover the risk of your defaulting on a payment. If your down payment is higher than 20% of the cost of the home you are buying, you may be able to negotiate away paying PMI, even on a bad credit mortgage loan.

As with a bad credit car loan, your history of on-time payments will begin to raise your credit score over time. Given a record of good payments, you may be able to refinance at a more reasonable interest rate. But before you sign for your bad credit mortgage loan in the first place, be sure to check the penalties for getting out of the loan early. Pre-payment penalties may be enormous and most people are so excited to get a bad credit mortgage loan, they neglect to consider what may change three years down the line.

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Cleaning up bad credit items

Let’s say your situation is so bad that you can’t find a lender willing to risk lending you money. Where do you go from here? You could wait a few years until bad credit items on your credit report fall off, usually in seven years for most items. Or you could begin the process of cleaning up your credit report as even a difference of a few points on your credit report score could make the difference between getting a loan or a refusal. If there are items on your credit report that are incorrect or should have been removed because of their age, write the credit bureaus and request their removal. They are required by federal law to make those corrections.

Mistakes on your credit report can be caused by human error. An account with a bad history could appear on your report because a clerk typed someone’s social security number one digit off. Rest assured, it happens. You could end up being saddled with someone else’s court record but you wouldn’t know until you inspect a copy of your credit report.

Include the good news

If you have paid off a delinquent account in the past but it does not show on your credit report, you will want to present proof of payment to the credit bureaus and have their records corrected. That can mean a few points on your credit report score.

You may find that a car note you have paid off was never reported to the credit bureau and though your payments were all on time, you are not receiving the benefits of that piece of good credit history. Contact the lender and ask them if they will report your credit file to the bureaus.

A word of caution

Well-intentioned friends and family often “hear” that you should do this, or that, to raise your credit report score and improve your chances of getting a bad credit loan. The most popular advice is that you should close your credit card accounts. This may sound reasonable but may affect you adversely. Make sure that if you take that route, you do not close the accounts with the longest history. It may be safer to close newer accounts but you should know that part of your credit report score is calculated by looking at the ratio of outstanding debt to total available credit. Close some accounts, lower your available credit and your score could go down.

Douglas Michaels is an editor, publisher and columnist. He works in the financial industry and now dedicates his time to helping others educate themselves on improving their credit scores. For more tips on credit matters read his blog or visit his website at http://www.my-credit-report-score.com

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Introduction

Mortgages are loans that are used to purchase real estate and come in many different forms. The most common types are Conventional, FHA and VA. Other types are Second, Reverse and Balloon Mortgages. These loans often involve the use of Discount Points.

Conventional

The conventional loan is the most common type of mortgage used in the nation today. Conventional mortgages are loans between borrowers and lenders that are not insured or guaranteed by the government. Conventional mortgages are either privately insured through private mortgage insurance companies or not insured at all. Conventional loan guidelines typically require a minimum down payment of five percent on owner-occupied (non-rental) properties; higher for investment/rental properties. For mortgages that have a down payment of less than 20%, private mortgage insurance (PMI) is usually required. Most conventional mortgages have time frames of 15 to 30 years and may be either fixed-rate or adjustable.

Fixed rate mortgages mean that the interest is permanently “fixed” at the rate available when the mortgage was created. The interest rate never changes no matter what interest rates do later. Fixed rate loans provide a level principal and interest payment that a borrower can depend on and are especially attractive when rates are low.

Adjustable rate mortgages mean that during the first few years, the interest rate will be lower than a typical fixed rate loan but will increase (adjust) upward to rates that are prevalent at a later date. Adjustable rate mortgages are normally used only when the borrower cannot currently qualify for the normal fixed rate interest level, but anticipates a larger income in the near future. The risk for the borrower is if that extra income does not materialize or if other expenses occur later on that cause the adjusted rate to not be affordable.

FHA

FHA loans are insured by the Federal Housing Administration, which is a division of HUD. The program was created in 1934 to stimulate the housing market during the Depression. FHA loans are insured by the government against default, but the mortgages themselves are made by major private lenders. FHA loans are often available from the same lenders who offer conventional loans. FHA maximum loan amounts are limited, and the maximum loan amount varies among geographic regions. High cost housing markets will normally have a higher maximum loan amount than lower cost areas. FHA mortgages are usually on a fixed-rate mortgage with terms of up to 30 years. FHA can lend up to 97% of the home value, and can be refinanced any time without a pre-payment penalty, and without having to qualify all over again. FHA insurance makes it possible for private lenders to provide mortgages to lower income families without attaching the rates and fees that sub-prime lenders do. FHA-insured loans have become an important element in the proposed solutions to the subprime mortgage crisis, and an FHA Reform package is making its way through Congress and will probably be a reality by the time you read this. The new package will enable FHA to accept even lower down payments and credit scores than they do now.

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VA

VA mortgage loans are loans insured by the Department of Veterans Affairs. The program was created in 1944 during World War 2 to assist returning military personnel in buying a home. VA mortgages are reserved for those who have served in the military or are currently in the military in active or reserve status. They are also available to qualified surviving spouses. VA loan guaranty is only for owner occupied properties, which can include homes, condominiums, townhomes, 2-4 family properties and manufactured homes, as long as it is owner occupied at least in part. By example, the applicant can obtain a mortgage for a duplex, live in one side and rent out the other side. VA mortgages offer the qualified veteran or active duty military person an opportunity to buy a home up to a specified amount with no down payment and do not require Private Mortgage Insurance (PMI). Like FHA mortgages, VA places a limit on the maximum mortgage amount. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a loan.

Balloons

A Balloon mortgage is a loan that is usually a short-term fixed-rate loan with even monthly payments amortized over a stated term, but provides for a lump sum payment to be due at the end of a specified term. These loans can be used as either a first or second mortgage. The nature of balloons are that the principal is not paid off entirely during its term and the monthly payments are often lower than they would be in a fixed rate first mortgage. Balloons are often used as a type of Second mortgage, especially when a borrower is seeking the lowest possible monthly payment in the short run. These loans carry an inherent risk for the borrower because that large lump sum becomes due and payable at the end of the term, so these financing options should be used with extreme caution.

Reverse

Reverse mortgages are becoming popular in America. They were designed only a few years ago and were made to help people who have retired and stopped working, but still have to make monthly payments. They are a special type of financing that lets a homeowner convert the equity in his/her home into cash. Reverse mortgages can be relatively complex, and their use should be considered carefully by the borrower. While they have been around for a long time, but it wasn’t until the early 1990s that they began earning respectability after the FHA began insuring reverse mortgages for repayment to lenders.

Second

These are used when a borrower needs additional financing to buy a home. Second mortgages are subordinate, meaning that in the event of default, the primary, or first lien would get paid off first, and then any funds remaining would be used to pay off any second liens. Second mortgages are also arranged for various purposes, such as financing home improvements, college tuition fees, debt consolidation or other emergency expenses. They are available as either fixed-rate loans, or adjustable-rate home equity lines of credit and are based on the market value of the home minus the balance of the first mortgage. Terms are typically shorter than the primary term and are commonly written at a higher rate of interest, due to the inherent risk of the loan. An advantage for the borrower is that the interest paid on a second mortgage is tax deductable, whereas payments for PMI are not.

Discount Points

Discount Points are used to buy your interest rate lower and are charged as a percentage of the loan amount. Discount points are entirely optional unless they are required for you to qualify for the loan payment, due to a lower than required income or higher than expected expenses. Discount points are paid in cash at closing and are typically charged to the seller. A common arrangement is that when discount points are charged, the seller will want to increase the price of the home to cover this expense. The result is that 80% or more of the discount point cost is actually financed by the buyer. Discount points are not to be confused with an origination or broker fee and are tax deductible only for the year in which they were paid.

Harry E. Davis is a Texas state certified residential real estate appraiser in Texas and is webmaster of the FHA Appraiser Directory Appraiser. Appraisals are available at Austin Texas Appraiser.