Buying a Home with Bad Credit: 9 Steps
There are many reasons you might have a poor credit rating. Problems such as lack of gainful employment opportunities, expensive medical bills or other situations can lead you to have been late with bill payments or to have defaulted on loans. This all adds up to a low credit score which can create a host of problems for you, particularly when it comes to funding large purchases.
If you are in such a situation, you may think that your desire to own a home is one that will never be realized. However, the following nine steps will show you how to turn your situation around and become a proud homeowner in a surprisingly short amount of time. Give consideration to the following nine tips, and you may finding yourself holding the keys to your new home before you know it.
#1 Review Your Credit Report
There are three different credit reporting agencies. They are Equifax®, Experian® and TransUnion®. The information these companies have about you may differ slightly from report to report. You can request a copy of your credit report from each agency for free once a year. According to eHow.com, "All three companies use AnnualCreditReport.com to streamline the request process. This website is sanctioned by the government." You should feel safe requesting copies of your reports through that site.
Contact each company individually to receive your credit reports and then review them carefully. You may find errors, such as reports of owed debts which have, in fact, been repaid or even someone else’s credit information, as can happen, particularly when two people with the same name share an address. Clearing up errors on your credit report is not easy, and it does take time, but it is the fastest way to get your credit score up.
#2 Seek the Help of a Credit Counseling Service
If you are struggling to clear up your debts and reverse your poor credit, some financial experts, such as Suze Orman, may recommend the services of a reputable credit counseling company. These agencies can help you arrange easier payment schedules and teach you ways to budget and better handle your money. Not only can a credit counseling enable you to improve your credit by using methods you might have otherwise overlooked, your pro-active step of working with such an agency can make you look more appealing in the eyes of a lender.
It may take between two and four years to improve your overall credit rating, but it will be worth it if you want to be able to get a traditional mortgage at a reasonable interest rate. The Better Business Bureau advises that before you work with a credit counseling service, you make certain that it is fully licensed and accredited.
#3 Be Willing to Accept a High Interest Rate
If you do not want to wait until your credit has improved, understand that if you are approved for a mortgage, you will likely be expected to pay significantly higher interest rates than the average consumer. According to Kathy Richards at CreditInfoCenter.com, those with poor credit can pay rates that are as much as double the rates that consumers with good credit are asked to pay. This means that your monthly payments will be higher, so you may have to settle for a more inexpensive house than you originally had in mind.
It is worth bearing in mind, however, that a higher interest rate will not only mean larger mortgage payments, it will mean a much larger sum of money will be paid to interest. For example, if you borrow $120,000 on a 30-year mortgage as a competitive rate of 4.5%, you will end up paying $98,888 in interest over the course of your loan. If you take out that same loan at a higher interest rate of, say, 6 percent, you will end up paying a total of $139,005 in interest. In this case, you would save about $40,000 by improving your credit score before applying for a mortgage.
#4 Avoid Adjustable Rate Interest Mortgages
Beth Braverman of CNN Money warns against falling into the trap of accepting an adjustable-rate mortgage to get a lower interest rate. The way these mortgages work is that you are quoted a rather low interest rate and this rate is fixed for a given number of years, usually between one and five. When this time period ends, you mortgage rate will fluctuate based on the going rates at the time.
Right now, mortgage rates are extremely low, but chances are good that in five years or so, they will be significantly higher. In this case, even the higher rate you might be asked to pay for a traditional fixed-rate mortgage may be lower than what your rate on an adjustable rate mortgage may end up being. Unless you are certain that you will be selling your home and moving on within a few short years, an adjustable-rate mortgage will likely only cost you more money in the long run.
#5 Avoid Predatory Lenders
Predatory lenders are not as common as they were prior to the bursting of the housing-bubble, but they are still out there. Even worse, a number of scammers are taking advantage of those with poor credit ratings who want to become homeowners. Some red-flags to look out for, according to ReponsibleLending.org, include high-pressure to take out the loan, balloon payments, penalties for early pay-off and unauthorized refinancing of your loan, or the request to sign loan-documents that have not yet been filled out.
Make sure that any time you work with a mortgage company or lender that you are dealing with a legitimate and established business. Remember, if a deal sounds too good to be true, it probably is.
#6 Save Up for a Sizeable Down Payment
This is one way to make getting approved for a mortgage easier. It can also help you save money by enabling you to get a better interest rate and, if you are putting at least 20 percent down, avoid the need to pay private mortgage insurance (PMI) in addition to your mortgage payment.
Keep in mind that homeownership comes with a lot of hidden costs. The need to repair a major appliance, replace a roof or waterproof a leaky basement are just some of the added expenses that are likely to crop up. If you are unable to set aside a couple hundred dollars a month to be used for a down-payment later, you may be in danger of further damaging your credit later when you are a homeowner. Make sure that you do not over-extend yourself by buying a house.
#7 Look into FHA Loans
If you are unable to come up with the money to make a down payment but really want to purchase a house now, an FHA loan may be the solution. These loans are available to low-income and higher-risk borrowers who can frequently borrow with little money down. According to WikiHow, an FHA loan can be had for as little as 3.5-percent down.
If you qualify for an FHA loan, you will need to pay extra toward mortgage insurance, but because these loans enable homeownership that may have otherwise been unattainable.
#8 Consider Rent-to-Own Options
When you engage in a rent-to-own deal, you rent the home from your potential seller but pay an additional amount with each rent payment, usually about $200. After an agreed-upon amount of time, typically three to five years, the extra money you have paid is provided to be used as a down payment on the house.
This sort of deal works very well for many with bad credit who are working toward improving their credit scores. You will have enough time to rebuild your credit and will have a good-sized down payment, so when you apply for a mortgage, you will have an easier time being approved and getting a great rate. One word of advice about these deals: if you change your mind midway through and decide not to purchase the house, the owner is permitted to keep money that had been set aside for the down-payment.
#9 Look for Houses Sold Through Seller-Financing
Believe it or not, there are a number of real-estate investors out there who are willing to sell low-cost properties to people with poor or no credit, and often they do this at low or no-interest. These investors purchase houses and properties that have gone up for auction because of foreclosure or owed back-taxes and they then sell them at a profit. Because their business depends on their being able to unload properties quickly, many offer seller-provided financing options.
If you buy a house this way, it is likely to be a fixer-upper so be careful that you do not buy something that will cost you so much to maintain that you cannot afford to make your payments. If you do default on your payment, the seller can rescind the deal and keep the money already paid as well as benefit from any improvements you have made to the property.
Once you have successfully purchased your first home, remember that you will need to show proof of homeowners insurance before you can close on your loan. When you get to this point, contact a local independent agent in the Trusted Choice network for help finding a suitable policy.
About the author: Financial blogger and business owner, Meg Stefanac, has more than 15 years experience working in the financial services industry and enjoys helping individuals make solid financial decisions. Meg has extensive experience writing about insurance and finances and is a key contributor to TrustedChoice.com.
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