This is good news for those who have bad credit and still wish to purchase a home. With a little research, you can find one of these programs that may help you achieve your goal to become a homeowner.
Home Buying Options for Individuals with Bad Credit
As a person with bad credit, most lenders will consider you as a risk. For this reason, it may be very difficult to buy a house with a traditional mortgage loan. If you are faced with this reality, there are still various options to consider.
- Sub-prime loans are high-interest loans targeted toward borrowers who are at greater risk of defaulting on the loan. Due to this possibility, a lender may charge you higher fees.
- Lease-purchase agreements, otherwise known as rent-to-own programs, offer potential borrowers another option for obtaining a mortgage. This type of agreement puts your monthly rent payments toward the purchase price of the home while you work to fix your credit. At the end of the lease, which is usually within one or two years, you have the opportunity to purchase the home if you've improved your credit enough to qualify for a mortgage. A portion of the rent paid acts as a down payment, resulting in a lower mortgage loan.
- A land contract or a contract for deed-of-purchase is an agreement between the seller and buyer. The seller agrees to finance the property and continues to hold the deed until it's paid in full. This is basically a mortgage that bypasses a third-party lender.
Credit Report and Credit Score
Banks consider your credit report and credit score an important factor when determining if you will be approved or denied for a mortgage. The three major credit bureaus -- TransUnion, Equifax and Experian -- collect information about your borrowing history to determine your credit report and credit score. The more you pay on time and pay off balances, the better your credit history. If you choose not to make timely payments and accumulate outstanding balances, you will end up with a bad credit report and low credit scores.
Mortgage Interest Rates
Mortgage interest rates will be higher because you are a higher risk for a lender if your credit score is below a certain level. Borrowers with credit scores of 579 or lower can expect interest rates of 9.5% or more on their mortgage loans, according to Bankrate.com. Typically, the mortgage interest rate for which you're approved determines your mortgage loan approval amount and establishes the amount you'll pay over the life of the loan. For instance, a person with a higher interest rate pays a lot more money for the same house as someone with a lower interest rate.
The down payment required is determined by how much the bank is willing to finance with the mortgage. For example, if you're trying to buy a $120,000 house and the bank will give you a $100,000 mortgage, you'll have to pay the remaining $20,000 as a down payment. Traditionally, the higher your credit score is, the lower your interest rate. The reverse is also usually true: the lower your credit score, the higher the interest rate.
Programs that Show You How to Buy a House with Bad Credit
Even with bad credit, it is still possible to participate in a government program to get assistance in obtaining a loan. There are several federal mortgage programs, housing counseling agencies and local home buying programs available to assist you with buying a home.
Federal Mortgage Programs
The Federal Housing Administration guarantees a loan as a part of HUD housing. Through the first-time home buyer's program, you may still qualify for a home mortgage even with bad credit. The FHA also has a fixer-upper program for borrowers who wish to fix up a home and have the repair costs included in the original mortgage loan.
Housing Counseling Agency
The Housing Counseling Agency offers assistance to everyone, whether you own a home now or are in the process of purchasing one. The agency works with you to resolve troubling issues in your credit history. Bad credit is not a deterrent for this program.
Local Home-buying Programs
There are local home-buying programs that offer assistance if you have bad credit. The types of programs available differ per location. For instance, several states have credit repair courses, and upon successful completion, you may qualify for an approved mortgage loan amount. You may also find help protecting yourself against predatory lending and buyer assistance programs.
Locate 40-Year Mortgage Lenders
The government has recently placed stricter regulations on banks. For this reason, it may be harder to find a lender if you have bad credit. However, you may find several mortgage lenders for bad credit loans by searching on the Fannie Mae website. Take your time to read the fine print on any programs or offers to ensure you understand the scope of the services.
Additionally, a mortgage broker can help you to assess your financing options when determining how to buy a house with bad credit.
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