When you ask most people, what will be your first purchase when you get your credit back on track, they will tell you a house!
But having bad credit is a barrier some can not overcome. Or if they get approved its for an amount that doesn’t come close to getting them the home they want or it’s at a rate that makes making the payments extremely difficult.
Below you will find a few alternative options to help you get into the home of your dreams!
Owner financing means that the owner is willing to be the mortgage holder and sell you the house directly. Many owners will do this for 3 to 5 years and at the end of the term there will be a balloon payment due. That’s when its expected you can find a new mortgage holder. The promissory note you sign with them will clearly state how long they will hold the note, the interest rate you are paying and the terms of the balloon payment.
The thought process behind this is simple. During the time the seller is financing you, the house will appreciate. You will also be working on improving your credit and paying down debt so your financial situation will improve enough for you to get a traditional mortgage. When you go to get a mortgage, you will be buying at the price on your contract. That appreciated value will bring down your loan to value.
Pros: You can get into a home you want, usually at a better rate then a sub prime lender
Cons: Seller financing is hard to find. Many people want to be done with the house when they sell it. Less than 10% of houses on the market offer seller financing. Also the seller has to own the house outright. If they still owe a lot on the home, their bank has to approve the deal. And if you have bad credit and weak financials, they can kill the deal.
Lease with an option to buy
The seller takes a large down payment from you. Sometimes as large as if you where buying the home. They agree to lease the home to you for 3 -5 years. At that point, you need to get a loan in your own name. Generally, a lease with an option to buy will have the following clauses:
- The down payment you give the seller is non-refundable. Meaning if you stop paying for any reason and they evict you get none of that money back.
- The contract you sign will basically make you responsible for all repairs to the home.
- A portion of the rent will go towards paying down the cost of the home. The amount depends on the seller.
- At the end of the lease contract if you do not get your own financing, the seller has the option to evict you. Thus, forfeiting your deposit and any other perks the seller may have been giving you.
Assumable mortgage. Some FHA and VA loans have what is called an assumable mortgage. Meaning as long as the bank agrees, you can take over the mortgage from the current owner. There are also a few ARM (adjustable rate mortgages) that are also assumable. Just make sure you are well aware of how and when the rate will adjust.
Federal Housing Administration (FHA) loans will approve consumers with credit scores as low as 580 as long as they can put down a down payment of 3.5%
Benefits of FHA loans:
- Low credit and down payment requirements
- Relaxed view at “gifted” money for your down payment
- Some states have grants to help consumers obtain FHA loans
- FHA loans allow for higher debt to income ratios then conventional loans
Things to watch out for when obtaining a FHA loan:
- Higher fees
- High monthly insurance cost – banks make these loans to high risk borrowers because they are government backed. Meaning if they have to foreclose the FHA will step in. But in order for the FHA to do this they charge a high monthly insurance. But unlike PMI insurance that you can get taken off your loan after about 5 years. With FHA, you pay the insurance for the lifetime of the loan. Which also makes the amount you pay back much higher then a conventional loan.
Larger Down Payment
I often tell my clients, bad credit + large security deposit (or security) = a deal. But when I’m approached by a business owner with bad credit AND no money. Well its going to be an uphill battle , and generally you never get as much as they need, or at a rate they can afford.
But when you have bad credit and come to the table with a substantial security deposit, the banks start to relax. Its unlikely someone will default on a loan with large security deposit. Follow that up with a detailed financial package. Include tax returns, bank statements, and if you just got an increase at your job, a note from your HR department detailing your new salary. Having a stable work history also helps.
There are lots of ways to get into a house even if you have bad credit. Ideally, for the best rates you have to wait until your credit score improves. If you are fixing your credit yourself. Be diligent. If you have been at it for a while and not getting anywhere. Then its time to call on a professional credit repair company. But regardless, while you wait, take the time to budget, save, and pay down your current debt.
Tip: Before you even contact a mortgage company, make sure you have paid off all outstanding collection or charged off accounts. If you allow a mortgage broker to pull your credit, your creditors will see you are looking to buy a home. They know that you must have all these negative items dealt with BEFORE you get approved. They will be less likely to make a “deal” with you to pay a lower amount. Even if the debt is very old.