Bad credit can trigger all sorts of financial stress and issues, especially having trouble buying a home and getting a mortgage.
If your credit is shaky, the safest and best route to purchasing a property is to save money and wait for your finances to improve. While that is not always feasible, there are a few options to consider when it comes to paying for a home with a loan.
Here are four ways a home buyer can possibly obtain a mortgage to buy a home:
A mortgage co-signer can help when your credit is weak.
If you are lucky enough to have a good friend or better yet a close relative with great credit and extra cash, you can apply for a co-signer home loan.
With this type of mortgage arrangement, the home buyer’s interest rate and loan approval are basically determined by the credit score of the co-signer, which means you will likely get loan terms that you otherwise wouldn’t be able to.
Timing is everything… use a bankruptcy as a borrowing advantage.
Even though a bankruptcy has negative associations attached to it, it usually signals the possibility of a new start with your credit profile.
A few years after you file for bankruptcy, mortgage lenders will likely focus less on your credit history and more on the rest of your financial portfolio such as: your annual income, your recent ability to pay reoccurring bills on time, and the ability to make a sizable down payment.
Save as much money as you can, pay your bills timely and consistently, always keep a steady job, and bad credit or not, you’ll likely qualify for a traditional loan after a few years.
In certain instances it may make sense to get an interest-only mortgage loan.
Interest-only home loans allow home buyers to pay only the interest on the loan for a specified length of time (usually 1-5 years.) This is a great borrowing option if you expect to earn have a substantial increase in income or, or if a large portion of your annual income in the form of commissions or bonuses. Either way, plan to refinance or pay off the balance of the mortgage at the end of the agreed upon loan term.
Ask the government for help, there are loan programs designed to foster home ownership.
The Federal Housing Administration (aka FHA) sponsors home loan programs that offer mortgage loans to home buyers with low market based interest rates. Take for example the FHA’s 203(b) program for first-time home buyers, which allows a down payment as low as 3.5% of the purchase price.
In may instances, some or most of your closing costs and processing fees can be included in the final loan amount.
FHA loans usually look less at specific credit ratings as long as the borrower can demonstrate a regular income that ensures consistent monthly payments.
It is wise to remember that regardless of your credit history, buying a home with a mortgage comes with the commitment to pay it back. Even if you have had credit troubles in the past, it is still possible to find a lender who will work with you to realize your dream of home ownership.