Bad credit mortgage alternatives
Do you know someone who feels that can only qualify for a bad credit mortgage loan? Several years ago, during the middle of a nasty divorce, a friend was told that she should file for bankruptcy. She did get the divorce, but never did file for bankruptcy. She did quit paying those debts and as far as I know they’ve all been written off and no one has tried to collect them in years. For the past five years she’s kept up with all of her new bills. Here’s her problem. Due to the recession, rents have been going up. She could make mortgage payments for less than she’s paying in rent. But she doubts that she can qualify for a mortgage. Here is what I think she should do
Like many others, she discovered that the recession has affected not only home sales, but also the price of rentals. And, for many renters, the cost of renting is greater than the cost of buying as rents have risen due to higher demand.
And again, like many others, her credit history could make it hard to qualify for financing, especially when banks are being cautious about potential borrowers and a bad credit mortgage is not in favor anymore. Let’s see what we can do to increase her odds of buying your own home.
She should begin by checking her credit report. If you haven’t done so recently — say, within the past three months — you should check your credit at AnnualCreditReport.com , the federally mandated site that gives you free access to your three major credit reports once a year. Contest any inaccuracies.
Next, check your FICO credit score — the three-digit number derived from your credit reports. You may even qualify for a free credit score ; if not, go to MyFICO.com and pay a nominal fee to pull your score. Knowing your score will help you determine if you’re likely to qualify for a mortgage. You’ll probably need a score of 725 or greater to get the best mortgage terms.
Avoid Getting a Bad Credit Mortgage Loan
Do what you can to improve your score. Don’t let a low score discourage you. Actually, you may be pleasantly surprised, since you’re already taking the most important step by paying your bills in a timely manner.
Generally, damaging credit info stays on your report for seven years — or 10 years for a bankruptcy. If you’ve been paying your bills on time for five years, that means that much of your bad info should drop off in a few years.
A warning to consider: Do not start to repay those old debts! If you’ve ignored them for five years, they will soon disappear from your credit report, and so they’ll no longer be figured into your score. But the seven-year period starts with the last activity on the account. So any payments would ” re-age ” the debt and restart the clock at zero. That keeps the account on your score for seven more years, and keeps you legally liable for the debt until the statute of limitations in your state runs out again.
Don’t fall for ads saying that they can erase bad credit info. If the information in your credit report is accurate, there’s nothing you can do to remove it until the seven years have passed.
Do attempt to get preapproved for a mortgage. If your score is marginal, stress the past few years when you’ve been a good credit risk. There’s a good chance that you’ll be turned down for a mortgage. Banks are being very cautious right now.
If you can’t get a standard mortgage, don’t let that stop you. There are several mortgage alternatives for people with bad credit:
- Find a landlord who is willing to do a lease with an option to buy. If you do an option to buy, you will want to get an attorney. While the concept of renting to own is simple, there’s a whole bunch of legal potholes that a lawyer can help you avoid.
- Private lenders may be more willing to give you credit, especially since they can hear how you’ve turned the corner and they’re familiar with the property that would secure the mortgage. They might also like the fact that you’ll probably be paying them a higher rate of interest on the mortgage than they can get in many income-producing investments today.
- Another possiblity would be to find a seller who is willing to take back the mortgage — which means the seller would be your lender. Again, by dealing with a private lender, you have a better chance of finding someone willing to work with you.
- Check in with programs for low-income homebuyers. Most assistance programs are run locally, so speak with you community social service agencies to find out what’s available. Some, such as Habitat for Humanity, require a certain amount of sweat equity, so you and family members would be expected to work on the house as it’s being constructed. You may be able to apply that sweat equity concept to the lease-with-option or seller-financed properties. After all, a rundown property is harder to sell and harder to get financing for. So an owner trying to sell a property that requires some work may be more willing to give you a mortgage — if you’re willing to do the work.
You may find that you just need to struggle through the higher rent for a couple of years while you work on raising your credit score. If that’s the case, see if you can’t talk your landlord into a two-year lease. That will lock in your rent for a longer period.
Finally, whether you’ve had financial problems in the past or not, it’s wise to monitor your credit score and check for errors, especially if you’re about to borrow for a major purchase.
