What Is a B/C Loan?

B/C Loans Explained in Less Than 4 Minutes

A couple smiles while working on a loan application

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A B/C loan is a type of mortgage or personal loan for borrowers with bad credit, undocumented income, or short credit history. Borrowers who apply and receive these loans don’t usually meet the credit score requirements outlined by Fannie Mae and Freddie Mac. 

About 30% of Americans have subprime credit, which means B/C loans are one of the few options for them to buy a home or pay off debt. Learn more about who qualifies for B/C loans, how the housing crisis has affected them, and what alternatives are on the market.

Definition and Examples of B/C Loans

B/C loans are for mortgage and personal consumer loan applicants with poor credit, undocumented income, or little to no credit history. Often, B/C loan borrowers have filed for bankruptcy or had a property in foreclosure in the past.

B/C loans are also called B, C, and D paper loans. These fall into the category of non-conforming loans, which do not meet the standards set by Freddie Mac or Fannie Mae.

Since B/C loan borrowers don’t qualify for “A” loans from traditional financial institutions, they must use alternative lenders, which usually charge higher interest rates and fees.

B/C loans tend to be issued as temporary loans until a borrower can improve their credit to qualify for a conforming A loan from a traditional lender.

  • Alternate name: B/C paper loan

If a consumer wants to take out a personal loan but has a credit score lower than 620, they might need to take out a B/C loan.

How B/C Loans Work

Borrowers need to determine their level of creditworthiness before applying for a B/C loan. Lenders commonly classify loans according to a borrower’s risk level.

An A-loan grading is the best rating and is available to borrowers who have a FICO credit score of 660 or higher and haven’t made any late mortgage payments for 12 months. It’s considered the top tier of eligibility, whereas B and C loans are within the second tier.

B-loan applicants have FICO scores ranging from 620 to 659 and have recorded a few late mortgage or installment loan payments in the past 12 months.

C-loan applicants have FICO scores from 580 to 619 and three or more late mortgage or installment loan payments over the last 12 months. Both B and C loans are referred to as “subprime.”

While B/C loans do not offer terms as favorable as A-labeled loans, they’re better than D loans. The lower the grade, the higher risk a borrower is for defaulting on the loan, which is why most conventional financial institutions don’t issue them. Instead, borrowers must rely on alternative lenders who charge higher interest rates and fees.

Are B/C Loans Common?

In recent years, traditional B/C loans have been harder to find. Lenders in some states still offer some versions of them. However, they nearly became extinct after the 2007 to 2010 subprime mortgage crisis.

“The classic B/C loan is gone,” said Jonathan Kern, president and owner of One Mortgage, LLC.

In Minnesota, where Kern operates his business, he said B/C loans are tough to come by due to stricter legislation passed after the 2008 mortgage meltdown.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, protects consumers from predatory lending practices and regulates lenders in order to prevent another financial crisis.

Federal Housing Authority loans now cover the subprime market in Minnesota and other states, said Kern. He said even though the B/C loan market has been slow to come back due to legislation, he believes it could make a return eventually.

Alternatives to B/C Loans

After B/C loans became scarce, the Federal Housing Authority (FHA) stepped in to aid borrowers left behind in the low credit market.

FHA loans are insured by the federal government but issued through FHA-approved lenders. Borrowers with a credit score as low as 500 can be eligible for an FHA loan depending upon income, assets, liabilities, and credit history. Applicants with minimal credit history are also eligible for financing, but must meet applicable underwriting guidance.

Key Takeaways

  • B/C loans cater to borrowers with poor credit, undocumented income, and minimal credit history.
  • Due to their high risk, B/C loans are issued by alternative lenders that often charge higher interest rates and fees compared to conventional loans.
  • B/C loans are less common due to stricter lending regulations passed after the 2008 mortgage crisis.
  • FHA loans have replaced B/C mortgage loans in many states.