Obtaining home loans for bad credit has almost become a thing of the past. Often referred to as subprime loans, bad credit mortgage loans require borrowers to provide large down payments and pay considerably higher interest rates. Before applying for bad credit loans, borrowers should research other home buying options and spend time comparing mortgage lenders.
Rather than take out bad credit home loans, borrowers should strive to restore credit and improve fico scores. Lenders assess interest based on borrowers’ credit history and scores. Borrowers with low scores are charged a substantially higher interest rate. Higher interest equals higher mortgage payments, which can cause financial stress and eventually lead to mortgage default and foreclosure.
In most cases, borrowers should work to improve their credit scores before applying for a home loan. However, if borrowers are given the opportunity to purchase a home at a price well below market value, it may be in their best interest to obtain poor credit financing.
In today’s real estate market, sellers have begun to offer alternative financing options to attract buyers who are unable to obtain mortgage loans through traditional sources. Common financing alternatives include: lease options, seller transfer financing, subject 2, and real estate loans from hard money lenders.
Home Path Mortgage from Fannie Mae offers discounted bank-owned foreclosures with special financing options. Home Path offers a low 3 percent down payment requirement and allows borrowers to get down payment assistance from family, friends or nonprofit organizations.
The Department of Housing and Urban Development provides Neighborhood Stabilization Program grants to individuals who purchase real estate in areas heavily affected by foreclosures. NSP grants are available to individuals and real estate investors. Applicants should submit grant applications to designated agents within their state. Program details and a list of NSP grant providers can be obtained at HudNSPhelp.info.
Leasing options can be beneficial for borrowers with poor credit. Sellers offering lease-to-own properties typically require buyers to provide a down payment of 10 to 20 percent of the purchase price. A contract is drawn up by a real estate attorney and the terms generally run from two to five years.
A part of the rent money is contributed to the purchase of the house. On average, renters contribute between 10 and 50 percent of monthly rental payments toward home purchase. Sometimes buyers can fix the purchase price when setting up the contract. However, most sellers require buyers to purchase the home at current market value once the lease option agreement expires. Lease option contracts should include legal language that protects both parties in the event of a mortgage default. Buyers generally lose all the money purchased if they do not honor the contract. Appropriate legal contracts and careful consideration must be created when entering into this mortgage financing alternative.
Borrowers with prior foreclosures or bankruptcies can find it almost impossible to qualify for any type of mortgage financing. The only option available might be loans from hard money lenders obtained through private real estate investors or investment groups.
Real estate loans from hard money lenders are expensive and should only be used as a last resort. Hard money loans should be used as interim financing while borrowers rebuild credit. Mortgage borrowers should strive to refinance mortgages within 12 to 18 months. Most hard money lenders require down payments of up to 50 percent of the purchase price. Sellers must charge interest in accordance with usury laws. However, interest rates can go as high as 23 percent in some states.