In order to obtain a conventional home mortgage loan today, borrowers must possess a high FICO score and the financial ability to provide a large down payment. Additionally, borrowers need to show a strong history of paying debts on time, along with a solid employment history.
Fortunately, home mortgage loan alternatives exist for borrowers with less than perfect credit. Due to the lack of qualified buyers, many sellers are now offering properties as rent-to-own. Buyers reside in the home as a tenant and pay monthly rent payments. A portion of rent money is contributed toward the purchase of the house.
In most cases, buyers are required to provide a down payment when entering into rent-to-own contracts. This can range from 5- to 20-percent. Lease to own contracts usually extend between two and five years to give borrowers time to clear negative credit or establish a credit history. Once the contract expires, borrowers obtain a conventional home loan to pay off the outstanding balance.
Another popular home mortgage alternative is known as seller carry back financing. When this technique is used, sellers act as the funding source and carry all or part of the home loan financing.
Seller carry back contracts are utilized as a temporary financing solution. Contracts typically last between two and five years. As with rent-to-own contracts, seller carry back requires borrowers to obtain a conventional home loan mortgage within two to five years.
Buyers and sellers engaging in lease to own and seller carry back mortgages should have legal contracts executed by a real estate attorney. Mortgage notes should outline terms of the transaction, rate of interest, principal sum, and default clauses which protect both parties.
A third alternative for obtaining bad credit home mortgage loans is to obtain hard money loans through private lenders or real estate investors. Hard money loans generally cost considerably more than traditional financing. Interest rates can range between 15- and 20-percent and borrowers are required to provide a down payment of 30- to 50-percent of the purchase price.
Bad credit mortgages are intended to be short term and last no longer than two or three years. Borrowers obtaining hard money home loans should strive to refinance into a traditional mortgage loan as quickly as possible. Most mortgage lenders will approve home loans once borrowers establish a history of consistently making payments for 12 to 14 months.
The United States Department of Housing and Urban Development (HUD) provides various homebuyer assistance programs. HUD mortgage loans are available to low-income buyers and individuals employed in certain professions including firefighters, police officers, and education.
The Federal Housing Administration (FHA) offers alternative financing options to buyers unable to meet conventional home mortgage financing criteria. Borrowers must provide verification of income, source of down payment (savings, inheritance or monetary gift) along with evidence stating the property is worth its appraised value. FHA lending limits vary by state and borrowers are required to submit mortgage loan applications through an approved FHA mortgage broker.
When buyers are unable to obtain conventional or alternative home mortgage financing, they should focus on clearing negative credit marks. This can be accomplished by paying off outstanding judgments or liens, reducing credit card balances, and consistently paying all bills on time for a minimum of one year.
If you are not certain of what is being reported on your credit report, start by obtaining a copy from each of the three major credit reporting bureaus. These include Trans Union, Experian and Equifax.
Not all creditors report the same information to credit reporting bureaus, so it is important to compare each report. Dispute any charges which have been repaid or written-off through debt settlement or bankruptcy.
Strive to reduce credit card debt to 20-percent of available credit. For example, if the line of credit is $5,000, borrowers should have no more than $1,000 in outstanding debt. Reducing outstanding debts and paying bills on time can raise fico scores by 100 to 300 points and allow borrowers to qualify for lower interest home mortgage loans.
