ADVISOR LOANOLOGY
If a lender is laughing at your ability to qualify don’t panic until you call us.
Prior Bankruptcy
It is a myth that it is impossible to get an SBA loan with a previous bankruptcy.
However, if you declared bankruptcy in the last three years…it isn’t a myth because it will be nearly impossible to get a lender to sign off on.
And, some lenders will simply not lend to anyone with a prior bankruptcy.
But there are lenders who will make exceptions or have scenarios that will allow for lending to previous BK borrowers.
Bankruptcy scenarios that can be typically worked around:
• If the BK is older than 10 years for some lenders.
• If the BK is older than 7 years for some lenders.
• The reasons behind the BK are important. Was it caused by a nasty divorce? Was it from a business venture in a different profession that went bust? Was there a serious health issue?
In all cases, if you have a prior bankruptcy a detailed letter of explanation will be required and this is something that should be prepared at the very beginning of the process so your Loan Advisor can have all the needed information (without surprises) in order to best advise you on your options and the lender to use for your situation.
Liens & Judgements
Public records such as tax liens, judgments, bankruptcies, and foreclosures not reporting on credit report will be discovered through the third party national public records searches banks pay for like Lexis Nexis, Data Verify or other third party public search companies.
If there are tax liens and judgments that have been already paid, no real problem.
A paid or released tax lien can remain on your credit file for seven years from the date released or ten years from the date filed. Unpaid or unreleased tax liens remain on file for ten years from the file date.
Tax liens and judgments that have a current balance and are still outstanding have to be resolved.
SBA lenders will not lend to an advisor with a current tax lien and they also will not lend to pay off a tax lien.
However, the SBA does allow for a federal (not state) tax lien settlement payoff loan as a legitimate loan purpose. If you have an IRS tax lien, have a settlement plan, and have been making your payments on time, the SBA program allows for a loan to pay off the IRS settlement.
Criminal Background
In general, SBA lenders don’t care if a borrower was arrested for a minor offense 20 years ago. Even certain felonies can be overcome if enough time has passed for some lenders.
However, when it comes to prior arrests and criminal records there are a few obvious policies that all lenders will have but most of the time it is grey area nuance that each lender will have a different perspective on.
If you committed any felony in the last 10 years, or have multiple misdemeanors in the last 5 years, or if you have had two DUIs in the last couple of years, it is going to be very difficult to get qualified for a loan.
Banks get very cautious when there is any arrest and criminal activity history with a borrower. If there are multiple offenses, very recent arrests, or a pattern of this kind of activity, banks will not move forward on the loan.
If you have been charged with a crime and received sentencing or other conditions the judge imposed, and the sentencing and other conditions of the court have not been satisfied then you would not be eligible for a conventional or SBA loan.
As a general rule, borrowers with a criminal record will have a better chance of getting an SBA loan approved than a conventional loan.
An explanation will be needed which must include the following:
Date(s) of each offense.
City or county and State where the offense(s) occurred.
The specific charge(s) and final conviction(s) (e.g. DUI, assault, forgery, etc.) and the level of each charge and conviction (either a misdemeanor or felony).
Disposition of the charge(s) and conviction(s), including all sentencing, conditions, or requirements of the court. This includes conditions such as registration on the Sex Offenders Registry, which provides for incarceration upon failure to comply with the conditions.
Background "Character" Issues
Character is one of the 5 C’s of credit eligibility. The issue of character covers a few different areas including your credit report, credit history, and personal background. These include your management ability and skillset, if there is a criminal record, prior bankruptcy or short sales, multiple or open judgements or liens.
The SBA has specific rules on “character” in their operating procedures that lenders must follow. The SBA requires that not only the borrower pass the “character test” but that also any general partner, officer, director, managing member of a limited liability company (LLC), owner of 20% or more of the equity of the Applicant, Trustor (if the Applicant is owned by a trust), and any person hired by the Applicant to manage day-to-day operations (“Subject Individual”) must be of good character.
If a character determination issue arises then the SBA does not allow for the subject individual to reduce his/her ownership in an Applicant within 6 months prior to the date of the application for the purpose of avoiding rule compliance. The only exception to the 6-month rule is when a Subject Individual completely divests his/her interest prior to the date of application.
Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the Applicant (and any associated Eligible Passive Company) in any capacity, including being an employee (paid, unpaid, or contracted).
The SBA also prohibits lenders from providing SBA loans to businesses with Associates who are:
Incarcerated, on probation, or on parole (an individual with a deferred prosecution, conditional discharge, order of protection, or who is on a sex offender registry is treated as if the individual is on probation or parole).
Currently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.
Prior Loss to Government:
A List of What an SBA Loan Cannot be Used For
The SBA has specific eligibility rules regarding borrowers with a prior loss to the government.
Payment of Delinquent Taxes
Loan proceeds must not be used to pay past-due Federal, state, or local payroll taxes, sales taxes, or similar taxes that are required to be collected by the Applicant and held in trust on behalf of a Federal, state, or local government entity.
However, payment of delinquent business income taxes may be permitted if the Applicant has an approved payment arrangement with the IRS and the Applicant is current on the payments in the arrangement.
Ineligible for an SBA loan if: Prior Loss to the Government or Delinquent Federal Debt
Prior Loss to Government
Unless waived by SBA for good cause, an Applicant is not eligible for a 7(a) or 504 loan if there is a prior loss to the Federal government. A “Prior Loss” has occurred when:
The Applicant has previously defaulted on a Federal loan or federally assisted financing, resulting in a loss to the Federal government or any of its agencies or departments.
Any other business owned, operated, or controlled by the Applicant or an Associate of the Applicant, previously defaulted on a Federal loan or federally assisted financing (or guaranteed a loan which was defaulted), resulting in a loss to the Federal government or any of its agencies or departments.
For purposes of this rule, “loss” means any deficiency on a Federal loan or federally assisted financing that has been incurred and recognized by a Federal agency after it has concluded its write-off and/or close-out procedures for the particular account and includes any amount compromised for less than the full amount, discharged through bankruptcy, and any unreimbursed advance payment under 8(a) or a similar program operated by a Federal agency.
NOTE: “Loss” does not include unpaid/delinquent taxes or any loss incurred by the Federal Deposit Insurance Corporation (FDIC) when it sells a loan at a discount.
SBA Loan Defaults
If a small business defaults on the SBA-guaranteed loan and SBA suffers a loss, the names of the small business, the guarantors of the SBA-guaranteed loan, and any Associate(s) that control the Applicant, get put on SBA’s naughty list, which may affect the eligibility of a business owned or controlled by any such individual(s) or entity(ies) for future financial assistance from SBA or other Federal agencies or departments.
Delinquent Federal Debt
Applicant is not eligible for a 7(a) or 504 loan if the Applicant or any guarantor owes an outstanding non-tax debt to the Federal Government, or any agency thereof, that is in delinquent status (hereafter referred to as “Delinquent Federal Debt”).
A non-tax debt owed to the Federal Government includes any amount of money, funds, or property that has been determined by an appropriate official of the Federal Government to be owed to the United States, or an agency thereof, by a person (including an individual, corporation, partnership or other type of entity), including debt administered by a third party as an agent for the Federal Government.
A debt is in “delinquent status” when the debt has not been paid within 90 days of the payment due date. The payment due date is specified in the creditor agency’s initial written demand for payment or other applicable agreement. A debt is considered “delinquent” even if the creditor agency has suspended or terminated collection activity with respect to such debt.
Waiver Requests
For good cause, SBA may waive the ineligibility of an Applicant due to the Prior Loss rule and Delinquent Federal Debt. The SBA Lender may send a written request for a waiver to the SBA loan processing center.
If the Prior Loss to the Government or Delinquent Federal Debt is fully satisfied, the application can be processed without a waiver.
Low Credit Score
FICO credit scores range from 300 to 850 points and can be obtained from any of the three national credit data reporting agencies (TransUnion, Equifax, and Experian). Each agency gathers information on millions of individual consumers and uses complex proprietary algorithms to determine credit behavior patterns and forecast the likelihood that a particular loan will be repaid.
The data used in determining an individual’s credit score is based on all credit related data. Under guidelines imposed by FCRA, an individual’s credit score does not contain any information pertaining to age, race, gender, or geographical location (zip code).
Check the Vendor portal for credit improvement firms and here is info that might be helpful on where to focus on fixing credit score.
Payment History 35%
The first and most important variable of the FICO score is the “payment history.” An individual consumer’s payment history accounts for 35% of the score. This variable is fairly intuitive for most consumers. In essence, it looks at whether the consumer has paid past credit accounts on time.
A few late payments will not drastically hurt a FICO score. On the contrary, making every single payment on time will not lead to a perfect score. Payment history is simply one piece of information used to calculate the score.
All types of credit lines are included. Namely revolving credit (i.e. credit cards, home equity lines of credit, etc.), installment loans (i.e. mortgage, vehicle loans, etc.), and open accounts (i.e. company charge cards, utility accounts, etc.).
FICO scores consider how late a payment was made (number of days), how much was owed (for that particular payment as well as the balance of the loan), how many payments were made late (number of missed or late payments), and how recently each of these instances occurred.
Payment History also factors in derogatory public information such as bankruptcies, foreclosures, civil law suits, wage garnishments, liens, and judgements. The above outlined derogatory items are quite serious and can potentially have a very drastic effect on the payment history variable of the FICO score. Older entries and entries pertaining to smaller dollar amounts have less impact than newer derogatory entries or entries with larger dollar amounts.
Amounts Owed 30%
The second most important variable of a FICO score is the “amounts owed on credit accounts”. This variable makes up 30% of the score. Owing a large amount of money is not necessarily a bad thing and will not have a negative impact on your score in and of itself. Credit reporting agencies look at several categories including the amount owed on all accounts, different types of credit accounts associated with a credit profile, number of accounts with balances, percentage of the available credit being used on revolving credit lines, and how much of the principal balance is outstanding on installment credit lines.
The purpose of this variable is to determine the overall financial health of an individual consumer. In other words, the lender uses this category to determine whether or not the consumer is overextended and the likelihood that the individual will make the payment past the due date or miss a payment entirely.
Length of Credit History 15%
The third component, “length of credit history”, accounts for 15% of a FICO score. As a general rule, a longer credit history with a good track record will increase a FICO score. However, since this variable only accounts for a small percentage of a FICO score, some people with shorter credit histories may have a high FICO score depending on the entirety of the credit profile. This portion of a FICO score accounts for the age of the oldest active credit account, age of the newest credit account, average age of all accounts, amount of time since credit accounts have been established, and frequency of use of revolving credit accounts.
The purpose of this variable is to establish a pattern of predictive behavior of the individual consumer based on their past use of credit accounts. A longer credit history is more beneficial than a shorter one due to the fact that the credit reporting agency has more information to predict the future use of credit and the likelihood of repayment or delinquency and default.
Types of Credit In Use 10%
The fourth factor which makes up a FICO score is “types of credit in use.” This accounts for 10% of the overall score. “Types of credit in use” analyzes the specific types of ac- counts associated with a credit profile. Examples include credit cards, mortgage, vehicle loans, retail accounts, and finance company accounts among others. It is not necessary to have every type of credit account in order to have a good FICO score.
However, having a healthy mix of account types in good standing is a positive indicator. Nonetheless, it is generally not a good idea to open unnecessary credit lines in an attempt to boost the score. It is also important to note, this score factors into the total number of accounts. Therefore, having too many accounts could be detrimental to the FICO score. Despite a common misconception to the contrary, closing an account does not remove it from a credit profile.
New Credit 10%
The final factor in determining the overall FICO score is “new credit.” This accounts for the remaining 10% of the FICO score. Opening a number of new credit lines in a short period of time could potentially be a red flag to lenders due to a perception that the individual consumer poses a greater risk. The negative impact may be more significant for individuals with shorter credit histories as it can potentially represent a negative event in a consumer’s financial health.
Common examples of negative events include loss of employment, unexpected medical expenses, or other unexpected significant financial burden(s). Although individuals with a well established credit history will not see as significant of an impact on his or her FICO score, it is generally a good idea to open new credit accounts only as needed. Along with new credit accounts, the second aspect of this category is the number of credit inquiries associated with a credit profile.