By Joe Silver
Having no, limited, or low credit scores can make buying a house challenging; you are viewed by lenders as a higher risk customer, and you will have trouble getting a poor credit home loan from many banks. There are some options to get a loan with average to poor credit, so you do not necessarily have to continue renting.
If you have credit that is bad – say 600 or lower – you will have trouble getting anyone to approve you for a home loan. Even if you can, you are likely to face higher down payment standards.
What to do? Consider owner financing. There are landlords and regular homeowners out there who need to get cash flow from a house, but for whatever reason, they may not want to sell it to a conventional buyer.
Sometimes, in a down housing market, the owner may have difficulty getting a high enough price to pay off what they owe. Or, the owner may be tired of being a landlord, and wants the house off his hands.
That's where owner financing can help him, and you! Here's how it works: the owner of the home is your lender; he is 'the bank.' He agrees to set up a private financing loan to you for, say, 30 years, $10,000 down, with 7% interest.
Your interest rate will likely be higher than market, because you after all have bad credit, and the owner needs to be compensated for that higher risk. But, you get to own a home of your own rather than rent, with a reasonable down payment. No more throwing money away on rent.
Also, once you close on that owner finance loan, you can and should get to work right away at fixing your credit. Pay your bills on time. Pay off credit cards. Get your score as high as possible. In a year or two, you may well be able to raise your credit score by 30, 50 or more points. Then, you can get a conventional mortgage loan at a market interest rate.
Just make sure that there is no prepayment penalty in the loan; you want to be able to pay off the poor credit mortgage loan and refinance when your credit score is higher.
Credit unions are like banks, but they are owned by members. Credit unions are nonprofit organizations, and they often have lower fees and lower interest rates on some home loans for poor credit.
If you cannot get a loan from a bank, a credit union may be able to help you.
There are many renters with poor credit who think that they have absolutely no chance of getting a home loan through conventional means. Fortunately, the Federal Housing Authority or FHA may be able to help you. This is a government agency that guarantees home loans against default.
This means that if you fail to pay your mortgage, the US government will pay off the lender for the mortgage balance.
This program encourages more mortgage lenders to work with people with average or bad credit. Even if your credit score is as low as 580, you might be able to get a loan at a reasonable interest rate with 10% down.
If your credit score is 620 or higher, you may be able to get approved for only 3.5% down; it depends on the specific lender.
Lenders are more willing to offer loans at reasonable interest rates because the poor credit home loan is guaranteed against default. You DO have to pay a monthly mortgage insurance charge, but you own your own home, and you probably are getting a very reasonable interest rate.
Many insiders believe that the revamping of Dodd-Frank and the Consumer Finance Protection Bureau will have a positive influence on expanding subprime and FHA loan programs for people with bad credit.
You may not realize it, but there are ways you can increase your credit score quickly. For example. If you do have some cash on hand, you should pay down your credit card balances. If you have thousands in debt and are able to pay off a lot of it, you can see a 30 point bump in your scores quickly.
Another option is to become an authorized user on someone's credit card who has good credit and an established credit history. You should only do this with a good friend or a family member you absolutely can trust. If the person has late payments, it will hit your credit!
A good card to do this on is Discover; this credit card company allows authorized users, and it takes your social security number when you apply. Therefore, you know that the card's activity will be reflected on your credit report. Getting a home loan with poor credit can be a great opportunity for consumers to rebuild their credit history.
Again, you have to be sure that the person whose card it is has good credit and pays their bills reliably. If the person has a $10,000 limit on a card that is several years old with a low balance, this will increase your credit score substantially.
You have quite a few options today if you want to get a home loan with bad credit. You should try these options and see which works for you.
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