Make your dreams of homeownership a reality despite having bad credit.
While it is possible to get a mortgage with a bad credit rating, you might have to make some concessions in regard to interest rate and the loan amount. With tighter lending restrictions, buyers must get creative if they want to purchase a home. The best way to buy a home is to first improve your credit. A credit score that is even fifty points higher might save you thousands of dollars of interest over the course of the loan. However, if you want to buy a home with bad credit, there are several ways to do so.
Pull your credit reports from all three bureaus: TransUnion, Experian and Equifax. Look over each report carefully and note any inaccuracies. Dispute any information you think is wrong by filling out a dispute form and sending it to each company. Removing just one or two derogatory accounts could significantly raise your credit score. Submit your disputes at least 30 days before you want to apply for a mortgage.
Visit your local housing agency or HUD office. Ask to speak with a counselor about securing a mortgage with bad credit. There are down-payment assistance programs and mortgage loans for low-income people or those with bad credit. There are also programs that encourage people to buy foreclosures and fix them up to improve the neighborhood.
Discuss with prospective lenders who cater to people with bad credit. Research the company with the Better Business Bureau before giving them any information. Fill out the online application and compare the interest rates from each company and the terms of each one. Most subprime lenders are out of business, but there are still some out there. Be prepared to pay a higher interest rate on these types of loans.
Discuss the possibility of doing a "rent to own" deal with a prospective home seller. Typically, you write a contract with the homeowner specifying a monthly payment with a portion of the payment set aside for the down payment, should you decide to purchase the home later. Improve your credit while you are renting so that you can qualify for a mortgage when the lease is up. The downside is that some people may not qualify for a loan after the rental period.
Purchase a less expensive house or one that needs repairs. People with bad credit may get approved for mortgages far below their desired amount, but having any type of mortgage on your credit report will improve your score, so consider a more modest home and fix it up. Homes that need repairs may qualify for a 203k rehab loan, which is offered through HUD. This type of loan is meant for new homeowners to rehab (fix up) the property in a specified number of days. The purpose of the 203k rehab loan is to revitalize the neighborhood by fixing up abandoned, run-down homes.
Save more cash and put down a higher down payment. FHA loans typically require less than 10 percent down, and conventional loans start at 20 percent down. A higher down payment equals less risk to the lender, since you have already invested a lot of money into the property. Plus, you will not have to pay PMI (Private Mortgage Insurance). PMI is extra insurance required of homeowners who put down less than 20 percent. Its purpose is to protect the lender against loss if the homeowner defaults on the loan. If you accept down payment money from family or friends, be sure to get all parties to sign a "down payment gift letter" that states the money is a gift and not a loan.
Things You Will Need
- Credit reports
- Pay stubs or other income verification
- Wait to buy a home until after you have improved your credit scores for the best deals.
- Be careful with accepting adjustable rate mortgages (ARMs). These types of mortgages raise or lower the interest rate based on the market's interest rate. If the interest rate is raised, it will cause your monthly mortgage payment to go up. Look for the loan caps, which limit how often and and how high the interest rate can go. The lifetime cap is the most important, since that dictates your highest possible rate of interest.
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A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral...
People's Choice Credit Union (previously Australian Central Savings & Loans) is an Australian credit union headquartered in Adelaide, with branches in metropolitan Adelaide, regional South Australia, the Northern Territory, New South Wales, Victoria and Western Australia. People's Choice is one of the nation's leading credit unions, with over...