Bad Credit – How to Overcome it to Buy a Home?

Before you decide to purchase a home, you need to check your credit report and score. Lenders decide to extend you credit based upon your credit worthiness. High risk borrowers may still be able to obtain a mortgage, but at higher interest rates. Borrowers with high credit scores and good credit get the best mortgages rates and terms. So the best thing to do before you buy a house is to clean up your bad credit and raise your credit score by paying off debts and making sure you pay your credit cards and other debts on time. If you cannot wait to improve your score, then there are alternatives. You may want to borrow the money from a family member or friend or have them co-sign for you so you can get a good mortgage rate and terms. If you have an IRA, a single taxpayer can use up to $10,000 of their IRA money as a down payment and a married couple can use up to $20,000 if they are considered first time home buyers. This definition extends to anyone who has not purchased a home in the last two years. This way you avoid paying a withdrawal penalty. Or you can borrow from your 401 (k). You have to pay the money back to your 401 (k) though. You should check with your tax advisor about using retirement accounts as down payments.       

Seller Financing

Seller financing is an option for borrowers with less than perfect credit. If the seller does not owe anything on their property, then they may be willing to finance the transaction. You could also ask the seller to finance a portion of the loan if you are able to obtain some traditional financing and use the seller financing to make up the balance of the purchase price less your deposit. This way you can purchase the home now, receive the tax benefits of owning a home and you do not have to wait to save a larger down payment or clean up your credit. With seller financing, you pay a higher interest rate in order to entice the seller into agreeing to finance the property for you. All payments are made directly to the seller. Basically, you would make your offer the same, and check the option that says seller financing, when it comes to purchase terms. You can open an escrow just like you would if you were purchasing the home with a traditional mortgage

Private Money Lender

A private money lender is a neutral third party that loans you the money to purchase an investment property. Private money lenders generally don’t care about your credit. They are more interested in the value of the home and whether they will be able to get a high rate of return on their money. These are short term loans usually for a year or two. Private money lenders do not have to follow traditional financing guidelines that banks and other financial institutions do so the terms of your loan can be whatever you and the private money lender decide. Generally, private money lenders charge a higher rate of interest for loaning you money. The good thing is the funds are available quickly within a week or two or less. If you are planning on purchasing an investment property, then using a private money lender might be a good idea if you are going to rehab the home with the intent of selling it right away.

Lease Option

Another alternative may be to do a lease option with the seller if they do not need to sell their home and receive all the cash now. With a lease option, you generally pay the seller an option fee upfront of $5,000 or less, which is non-refundable if you do not exercise the option to purchase the home. You can negotiate the purchase price at the time you enter into the lease option or at the time you exercise the option. If prices are going up, then you might want to firm up the purchase price at the time you enter into the option agreement. If they are going down, then you probably want to agree on the price at the time you exercise the option.  A portion of your rent is generally applied towards the purchase price. Lease options are good alternatives if you really want to buy the home because you get extra time to save for a down payment and clean up bad credit so you can qualify for a mortgage at the time you exercise the option. If you do not exercise the option, the seller gets to keep the rent and the option money, and you can walk away.

You can always wait and save more money and pay cash from your home or wait until your credit improves if you want to obtain a traditional loan instead of opting for some alternative financing.  The best thing to do is to investigate all your options and then make a decision based upon what is the best one for your financial situation

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