How To Buy A Home With Bad Credit

Even as tight as lending is there are still a few options left on how to buy a home with bad credit. But the big question is….how bad is your credit?

Any credit score below 620 is considered bad credit in the mortgage world. So if your credit is at the score or higher you should have no problems. If you get told no by a bank because of your credit you should definitely go see a mortgage broker as they have many more options and lenders to work with.

If you are below a 620 you will typically need 20% down or more. This will depend on the home you are buying as well as the type of loan you are getting.

Homepath which is a division of Fannie Mae currently allows people to buy one of their foreclosed home with just a 580 credit score. This program requires that you have at least 20% down and you must buy one of their foreclosed homes. The interest rates on this program will typically be 1% to 1.5% higher than if you had a 620 score or better.

You other option is to use a hard money lender or sometimes referred to as private lenders. This may be your only option in your quest of how to buy a home with bad credit. But be prepared. You will need at least 35% or more down. The interest rates will vary but you can expect to pay anywhere between 10% to as much as 14% in interest rates.

When using a hard money lender you may be able to get away with less money down if you can get the seller to carry back a second mortgage. For example let’s say you are buying a home for $200,000. You have $25,000 down. If you could get the seller to carry back a second of $75,000 the private lender would give you a loan of $100,000.

The other thing you need to know if you use this how to buy a home with bad credit

method is the costs. Hard money is not cheap. You will typically pay 5 to 10 points plus the other loan costs.

Another option to buy a home with bad credit, which is quite creative is to do a lease option. This is simply leasing the home with an option to buy. The great thing about using this method is that you lock in the price today regardless of what its future value may be. You can also have a portion of the monthly lease payment get credited back to you to reduce the purchase price when you execute your option and buy the home.

The reason this is a good way to buy a home when you have bad credit is that while you are leasing the home you have time to fix your credit. Secondly, when you do execute the purchase the lenders will treat it as a refinance. This will allow you to lump in all of the closing costs into the loan and typically you will not be required to have a down payment because they will base everything off of the value not the purchase price.

Hopefully this article has opened your eyes to the possibilities you have on how to buy a home with bad credit. All you need to do now is take action and get the process started.