Mortgage loans for bad credit used to be commonplace, but today they are nearing extinction. Bad credit loans are often referred to as subprime lending. When bad credit loans are obtained for real estate purchases, borrowers are usually required to provide a substantial down payment and charged extremely high interest rates. While this type of financing can be tempting to those with less than perfect credit, these types of loans are often the catalyst to bankruptcy and financial ruin.
Instead of entering into mortgage loans for bad credit, borrowers should first engage in credit repair strategies. Improving FICO scores and building a solid credit history will save borrowers thousands of dollars in interest and lessen the potential to lose the property to foreclosure.
Mortgage lenders charge interest based on credit scores. Those with fico scores below 600 will be charged a higher rate than borrowers with scores of 720 or higher. High interest rates result in higher mortgage payments. With mortgage loans, even a quarter percent increased rate of interest can add thousands to the overall loan balance.
With that being said there are instances when a real estate deal comes along that is too good to pass up. If poor credit borrowers are given the opportunity to buy a house at 30- to 40-percent below market value, it may be a wise decision to seek out a bad credit lender loan mortgage.
Since mortgage loans can be challenging to obtain, many sellers have started to offer creative financing options to buyers who do not qualify for conventional mortgages. Financing options currently used include: seller carry back mortgages, subject 2, lease options, and hard money lender real estate loans.
Lease options can be a good choice for bad credit borrowers as long as they engage in due diligence. When sellers engage in lease-to-own contracts, buyers provide a down payment and execute a real estate contract which outlines the terms.
Rent-to-own contracts typically extend for two to five years. A percentage of rent money is contributed toward purchasing the property. On average, sellers contribute 10- to 50-percent of rental payments toward the purchase price. Once the contract expires, buyers obtain a conventional home loan to pay off the outstanding balance.
Some sellers will lock-in the purchase price when the contract is drafted. Others require buyers to purchase the home at market value when the lease option expires. Real estate lease option contracts should include legalese that protects all parties in the event of default. If buyers default on the contract, sellers usually keep all vested funds. Careful consideration should be given before entering into this mortgage financing alternative.
Fannie Mae established the Home Path Mortgage program to liquidate foreclosure properties and provide borrowers with blemished credit the opportunity to buy a house. Special financing options allow borrowers to obtain down payment assistance from outside sources, which is prohibited through most types of mortgage loans. Additionally, Home Path only requires a low down payment of 3-percent.
HUD provides grant money to qualified borrowers purchasing real estate in areas hit hard by foreclosure through their Neighborhood Stabilization Program. NSP grants are available to both home buyers and real estate investors. Applicants are required to submit applications through HUD-approved agents within their state. A list of NSP grant providers is available at HudNSPHelp.info.
Borrowers who have filed bankruptcy or entered into foreclosure within the previous two years may not qualify for any type of mortgage funding. However, if they are capable of providing a large down payment they might qualify for hard money lender loans offered through private investors or investment groups.
Hard money loans are very expensive and intended as interim financing while borrowers rebuild or establish credit. Borrowers should strive to refinance mortgages as soon as possible. Most hard money lenders require a 50-percent down payment and charge interest rates as high as 23-percent. Hard money loans are subject to state usury laws which limit the amount of interest a private lender can charge.
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