Bad credit mortgage loans vs. creative financing options
Getting mortgage loans for bad credit is almost a thing of the past. Often referred to as subprime lending, bad credit mortgages require borrowers to provide large down payments and pay significantly higher interest rates. Before applying for bad credit loans, borrowers should research other home buying options and take the time to compare mortgage lenders.
Instead of getting mortgage loans for bad credit, borrowers should strive to rebuild credit and improve their fico scores. Lenders assess interest rates based on borrowers’ credit history and scores. Borrowers with low scores are charged a significantly higher interest rate. A higher interest rate equals higher mortgage payments, which can cause financial stress and ultimately lead to mortgage defaults and foreclosures.
In most cases, borrowers should work to improve their credit score before applying for a mortgage loan. However, if borrowers are given the chance to buy a house at a price well below market value, it may be in their best interest to get bad credit financing.
In today’s real estate market, sellers have begun offering alternative financing options to attract buyers who cannot obtain home loans through traditional sources. Common financing alternatives include: lease options, seller reverse financing, entity 2, and hard money lender home equity loans.
Fannie Mae’s Home Path Mortgage offers reduced bank foreclosures with special financing options. Home Path offers a low down payment requirement of 3 percent and allows borrowers to get down payment assistance from family, friends or nonprofit organizations.
The Department of Housing and Urban Development provides grants under the Neighborhood Stabilization Program to individuals who purchase real estate owned properties in areas heavily affected by foreclosures. NSP grants are available to individuals and real estate investors. Applicants must submit grant applications to designated agents within their state. Program details and a list of NSP grant providers can be obtained at HudNSPhelp.info.
Leasing options can be beneficial for borrowers with bad credit. Sellers offering rental properties typically require buyers to provide a down payment of 10 to 20 percent of the purchase price. The contract is drawn up by a real estate attorney and the terms usually last from two to five years.
Part of the rent money is contributed to the purchase of the home. On average, renters contribute between 10 and 50 percent of their monthly rental payments toward the purchase of a home. Sometimes buyers are allowed to lock in the purchase price at contract. However, most sellers require buyers to purchase the home at current market value after the lease option expires. Lease options must include legal terms that protect both parties in the event of a mortgage default. Buyers usually lose all money invested if they default on the contract. Careful consideration and appropriate legal contracts should be created when entering into this mortgage financing alternative.
Borrowers with a previous foreclosure or bankruptcy may find it nearly impossible to qualify for any type of mortgage financing. The only option available may be hard loans from lenders obtained through private real estate investors or investment groups.
Home equity loans from hard money lenders are expensive and should only be used as a last resort. Hard money loans are meant to be used as temporary financing while borrowers repay the loan. Lenders should aim to refinance mortgages within 12 to 18 months. The majority of hard money lenders require down payments of up to 50 percent of the purchase price. Sellers must charge interest in accordance with usury laws. However, interest rates can jump as high as 23 percent in some countries.
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