Buying a Home with Bad Credit
Buying a Home with Bad Credit
Owning a home is the ultimate American dream. It is also the best way to build wealth for yourself and for future generations. Having bad credit should not prevent you from owning a piece of the American dream.
If you have poor credit – you are not alone. It is estimated that approximately 30 million Americans struggle with bad credit from having excessive credit card debt and not paying their bills on time. Unfortunately, rising medical costs, job layoffs, ridiculous gas prices and escalating home prices are exacerbating the rate at which Americans are falling into the bad credit pit.
Without a doubt, no other process renders you more ashamed and more aware of your bad credit score than the act of purchasing a home. Buying a house with good credit is horrendous enough, for first time homebuyers. For people with bad credit, it is an act of congress but it need not be. Here are four easy ways to buy a house with bad credit.
Keep it in the family. Get a relative who has good credit to purchase the house on your behalf. A family member with a solid credit history, will get a good interest rate thereby making your monthly mortgage payments more affordable. You will also get some exposure to the home buying process without being overwhelmed.
After your relative closes on the house, you must take over the mortgage payments, insurance and taxes. This will ensure that you get the tax benefits of being a home owner right away. Arrange for your relative to sign a “Grant Deed,” to add your name to the title of the property. This makes you a co-owner of the house.
At this point, you should focus on rebuilding your credit score to between the 675 to 715 range – the higher, the better but you can make this your initial goal. To improve your score, you must live by these three rules:
Pay your bills on time – always.
Do not open up too many lines of credit. Keep one or two lines of credit.
Do not max out your credit cards.
Once you have achieved a good credit score, your relative can sign another “Grant Deed” to take their name of the property title – making you the full owner of the house.
Self Serve. If you do not have a family member or friend, who can buy the house on your behalf, then you will have to buy the house on your own. The internet has created a competitive mortgage industry so that there are large banks whose entire divisions are dedicated to bad credit home loans.
According to the Fair Issacs Corporation (FICO), if you have a FICO Score of 550, your likely interest today would be 9.289%, while a person with a FICO Score of 700 would get an interest rate of 5.867%. On a $200,000 mortgage, the difference in monthly mortgage payments would be $426.00. This is a lot of money, but do not obsess over it. The lesson from this exercise, is to realize the importance ofimproving your credit score. Once you raise your credit score, you can refinance the mortgage to get a lower interest rate thereby reducing your mortgage payments.
Rent to Own. You have seen the advertisements in the newspaper. If you are a renter and can afford monthly mortgage payments but do not have the 10% to 20% down payment required to buy a home – this is a great option. “Rent-to-own,” legally referred to as “Lease Option” works as follows:
Buyer finds a home.
Buyer and seller agree on a sales price (for example $250,000)
Buyer pays seller a non-refundable option fee. This fee is the price that the buyer pay the seller for granting them the option to buy the house.
Buyer and seller agree on interest rate, option term and down payment. For example, the terms of the contract may be 8%, 24 months and a down payment of $2,500. The buyer does not to pay the $2,500 in one lump sum but rather over the period of 24 months.
Total monthly payments to the seller will be the principle and interest on a $250,000 mortgage loan at 8%, which is $1,834 (assuming 30 year fixed) plus $104.17 ($2,500/24 months) for a total of $1,938.17. At the end of the 24 months, you have the option to purchase the house or pass up the deal.
The biggest advantage to the “Rent to Own” process, is your ability to lock-in a price today for a future home purchase. In other words, if the house is worth $260,000 in 24 months – you immediately have $10,000 equity in the home.
Seller Financing. Get the seller to finance your home purchase. Bypass the hassle of getting a conventional loan and find a motivated seller, who is willing to finance your home. The way to do this, is through a “wraparound mortgage,” legally termed an “Inclusive Trust Deed”. In a wraparound mortgage, you purchase a house by assuming a subordinate mortgage to the original mortgage on the house.
This scenario works as follows:
Buyer finds a home.
Seller is currently carrying a mortgage on the house, in the amount of $200,000 at a 7% interest rate.
Buyer and seller agree on a new sales price, interest rate and down payment (for example $250,000, 8.5%, $25,000).
Buyer puts down $25,000 as down payment and assumes a loan for $250,000 at 8.5%. Buyer makes payments to the seller on monthly basis.
Seller pays original loan mortgager on a monthly basis and pockets difference.
This option negates the arduous process of finding a conventional loan. In addition, you avoid closing costs, which can be quite steep in some states (up to 5% of the sales price).
Any of these four options will lead you down the path of home ownership. Buying a home with bad credit is an attainable goal.
(by Delia Galley)
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