When it comes to securing home purchase loans with bad credit, whether through a traditional lender or an alternative lender, the approval process can differ by quite a margin. Approval chances can also vary, as can the terms and the generally affordability of the financing deal. But what both have in common is a chance of securing approval.
A mortgage is probably the largest debt anyone will take on in their lives, so it is to be expected that there be difficulties in nailing down the best deal. The promise of guaranteed mortgage approval is sometimes offered, but it would be foolish to believe in it. What does exist is a way to improve the chances of approval.
A home purchase loan is available even to those borrowers with low credit ratings. And while compromises need to be accepted, the borrower can at least feel confident that a mortgage package is out there that best suits their particular needs.
It is a little misleading when lenders advertise guaranteed approval for a loan of any description. All loans have criteria that must be met before the application itself can even be considered – such as age requirements and citizenship. When it comes to securing home purchase loans with bad credit, loans that are extremely large, guaranteed mortgage approval cannot be promised.
What can be guaranteed, however, are matters like no credit checks, where the lender ignores the credit score of the applicant. In such cases, set interest rates are charged regardless of how good or bad the score is, and these are usually higher than normal to cover the risks of such a policy.
Of course, home purchase loans can be as large as $200,000, depending on the value of the home being purchased, and so the interest can be very high. But there are some ways to increase the chances of approval, thus making it practically guaranteed.
So how can the chances of approval be improved? Well, the success in securing a home purchase loan with bad credit rests on the ability of the applicant to prove they can afford the repayments. This chiefly comes down to the debt-to-income ratio.
The ratio is calculated by adding all existing outgoings per month and measuring the figure against the total income. The ratio stipulates that no more than 40% of the excess income be used to make payments. So, if excess income is $1,000 per month, the closest an applicant can come to guaranteed mortgage approval is to secure a mortgage requiring only $400 per month.
Drastically lowering existing debts will improve the situation, ensuring a greater excess income. A consolidation loan can do the trick, clearing the debts in one go and replacing them with a loan requiring lower monthly repayments. This must be done several months before seeking the home purchase loan.
Of course, what may be affordable now may not be so 5 or 6 years from now. What recent times have proven is that a sudden economic crisis can change our financial status very quickly, so having contingency plans in mind when seeking a home purchase loan with bad credit is a good idea.
Thankfully, it is always possible to refinance a mortgage deal after a number of years, often using home equity to leverage extra financing. And when repayments are made regularly, the overall credit status improves too. It makes approval (though still not guaranteed mortgage approval) much more likely when applying for future loans.
Negotiating a new home purchase loan will save money every month, ensuring your home repayments are always affordable. And that protects against the risk of defaulting and losing your home.
The Business and Industry (B&I) loan program administered by the United States Department of Agriculture (USDA or Agency) guarantees loans by qualified lenders to benefit rural businesses. For eligible projects, community banks can obtain an 80% guarantee for loans up to $5 million, a 70% guarantee for loans between $5 million and $10 million and a 60% guarantee for loans between $10 million and $25 million. The B&I guaranteed loan program allows lenders to expand their loan portfolio, obtain a deficiency guarantee, increase earnings by participating in the secondary market, make loans in smaller communities with traditionally lower collateral values and extend loans above their legal lending limits.
For each loan, lenders submit a detailed guarantee application to the Agency office in the state where the project is located. Approval or denial decisions generally take several weeks. Projects eligible for B&I financing include business acquisitions, commercial real estate purchases, startup costs and working capital, machinery and equipment purchases and some refinances.
On December 17, 2008, the USDA published a new interim rule pertaining to the B&I loan program in the Federal Register. Effective October 1, 2009, the new rule is designed to streamline the application, accelerate the guarantee approval process and expand the types of eligible projects. The Agency ultimately decided to abandon the new rule and instead focus on working within the existing regulatory framework to improve the B&I loan program.
Under the previous rule, the B&I loan program required lenders to compile burdensome applications and to deal with lengthy approval timelines and limited loan features. For example, a common lender complaint has been the laborious guarantee application process. For every loan under the previous regulations, B&I lenders had to submit to the local Agency all of their underwriting and loan approval documents, at least three B&I application forms, the draft loan agreement, copies of loan origination and servicing policies and procedures, and details concerning lending history, experience and their relationship with regulators. The Agency also awarded guarantees on a “priority scoring” basis, which gave loans in particularly rural areas with compelling purposes priority over otherwise eligible loans that earned a lower “score”. An approval or denial decision for lower scoring loans could take months from the application submission.
The USDA aims to reduce these drawbacks with the revised rule. The new rule attempts to streamline the original application process. Lenders must apply to participate in the guaranteed loan program by submitting background information such as descriptions of lending history and experience, policy and procedures and documentation concerning regulatory compliance (7 CFR 5001.9). Although lenders had to submit this information under the old rule, they are now permitted to submit summaries instead of copies of their policies and procedures (§5001.9(a)(1)). Once approved by the agency, lenders will no longer have to submit this background information when applying for loan guarantees (§5001.9(b)(4)). The revised rule also reduces the number of guarantee application forms (§ 5001.12(a)) and eliminates the draft loan agreement (§5001.34). In addition to simplifying the application process, the new rule endeavors to reduce the guarantee approval timeline.
Two changes aim to accelerate the guarantee approval process. The Agency has eliminated its “priority scoring” system in favor of a simpler slickcashloan first-come-first-serve approach (§5001.103(f)(1)). Additionally, the Agency has created a preferred lender program (PLP) (§5001.9(d)). The benefits of obtaining PLP status include a ten day approval or denial decision (§5001.11(c)), a smaller guarantee application package (§5001.12(b)) and the opportunity to obtain preferred status in more than one state with a single PLP application (§5001.9(d)(2)). In addition to streamlining the application process, the Agency has introduced some new loan features to the B&I loan program.
B&I guarantees may now be issued for additional uses and purposes. Under the previous regulations, lines of credit were ineligible. Lines of credit are now eligible when used for annual operating/business expenses, debts advanced for the current operating cycle, scheduled non-delinquent term borrower debt or closing costs (§5001.103(b)(2)(xix)). Projects involving leasehold improvements and the purchase of mixed use commercial and residential buildings are also now eligible for B&I guarantees (§5001.103(b)(2)(xviii, xx)). Another new feature removes the prohibition that interest rates change no more often than quarterly, and allows lenders to set a variable rate that adjusts as often as daily (§5001.31(a)). These new features allow lenders to obtain a valuable B&I guarantee for projects that previously were ineligible.
Although these features are now available to lenders, some revisions to the rule are less clear and useful tools have been eliminated. For example, the Agency has replaced the proposed cash equity criterion with a debt-to-tangible net worth ratio criterion (§5001.6(c)), but has failed to define this calculation other than referring to Generally Accepted Accounting Principles. Additionally, the rule eliminates the Agency’s limited authority to issue 90% guarantees. Again, the Agency ultimately decided to abandon the new rule and instead focus on working within the existing regulatory framework to improve the B&I loan program.