Mortgage Loans For Bad Credit And Alternative Options For Buying Houses
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By Simon Volkov
Mortgage loans for bad credit are also known as subprime lending. This means loans are assessed with a higher rate of interest because borrowers are categorized as high-risk by the major credit reporting bureaus.
While mortgage loans for bad credit can be tempting, this type of financing often leads to personal bankruptcy and foreclosure. The results can devastate borrowers’ credit for years to come and prevent them from qualifying for any type of loan.
Instead of taking out a high-interest mortgage loan, borrowers should take on credit repair strategies to improve their credit rating. Interest rates are based on credit scores and can add as much as 2-percent additional interest when FICO scores fall below 600 points. It is best to have a credit score of 720 or higher to obtain the lowest rate of interest.
Mortgage loans extend for 15 to 30 years. As little as one-quarter percent additional interest can add thousands of dollars to the loan balance. Therefore, it is crucial to calculate the true cost of entering into bad credit mortgage loans.
Prior to the banking industry collapse it was relatively easy to qualify for a mortgage loan. In fact, subprime lending has been blamed for the demise of the real estate market. Millions of homeowners obtained no money down, no credit check, no employment verification, bad credit loans which included a balloon payment. Many borrowers were unable to afford the balloon payments which eventually forced them into foreclosure.
Today, banks scrutinize home loan applications and have tightened lending requirements. A recent report by Reuters states, “existing home sales dive to a 15 year low” leaving sellers holding real estate as property values decline.
In attempt to locate buyers, many property owners are turning to creative financing strategies such as lease options, seller carry back mortgages, and subject 2.
Lease options involve contributing a portion of rent money towards purchasing the home at a later date. Tenants typically provide sellers with a down payment and enter into a real estate contract for two to five years. This provides buyers time to build or re-establish good credit so they can qualify for a mortgage loan when the contract expires.
Both buyers and sellers should conduct due diligence. Lease option contracts should be executed by a real estate lawyer. Contracts should include legalese to protect both parties in the event of default. It is imperative to investigate the property to ensure the seller is current on their mortgage loan and property taxes.
Seller carry back mortgages involve the seller carrying all or part of the financing while the buyer engages in credit repair. Few sellers offer 100-percent financing. Most require buyers to provide a down payment and obtain bank financing for a portion of the loan. In essence, buyers have two mortgages. Since the seller is carrying part of the loan, banks are often more willing to approve financing. Once the seller carry back contract expires, buyers refinance the mortgage to obtain a reduced rate of interest.
Home Path Mortgage is a special financing program offered by Fannie Mae. Qualified buyers can obtain down payment assistance from outside resources and are only required to provide a 3-percent down payment. Home Path offers Fannie Mae foreclosure properties; most of which are priced at 10- to 20-percent below market value.
The Department of Housing and Urban Development (HUD) offers home buying grants through the Neighborhood Stabilization Program. Buyers and real estate investors can apply for NSP grants when buying houses in areas hit hard by foreclosure. Applicants must submit applications through local agents. A list of state NSP grant providers is published at HudNSPHelp.info.
These are just a few alternatives to entering into bad credit lender loans. While buying a house is exciting and rewarding, it is important to get personal finances in order before beginning a house hunting expedition. Otherwise, you will pay considerably more for the loan and potentially place yourself into a risky situation which could lead to foreclosure and ruin your credit for years to come.
About the Author: Discover more mortgage loans for bad credit alternatives from California real estate investor and author, Simon Volkov. His website provides information regarding hard money lenders, creative financing strategies, buying foreclosure real estate, personal finance, and real estate investing opportunities at SimonVolkov.com.
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