Mortgage Loans For Bad Credit Vs Creative Financing Options

Obtaining bad credit home loans has almost become a thing of the past. Often referred to as subprime loans, bad credit home loans 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 spend time comparing mortgage lenders.

Rather than take out bad credit home loans, borrowers should work to restore credit and improve fico scores. Lenders assess interest based on borrowers’ credit history and scores. Borrowers with low scores are charged a substantially higher interest rate. Higher interest equals higher mortgage payments, which can cause financial stress and eventually lead to mortgage default and foreclosure.

In most cases, borrowers must work to improve their credit score before applying for a home loan. However, if borrowers are given the opportunity to purchase a home at a price well below market value, it may be in their best interest to obtain poor credit financing.

In today’s real estate market, sellers have begun to offer alternative financing options to attract buyers who cannot obtain home loans through traditional sources. Common financing alternatives include: lease options, seller transfer financing, subject 2, and real estate loans from hard money lenders.

Home Path Mortgage by Fannie Mae offers discount bank-owned foreclosures with special financing options. Home Path offers a low 3 percent down payment requirement and allows borrowers to get down payment assistance from family, friends or non-profit organizations.

The Department of Housing and Urban Development provides Neighborhood Stabilization Program grants to people who purchase real estate in areas hard hit 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 lease-to-own properties typically require buyers to provide a down payment of 10 to 20 percent of the purchase price. A contract is drafted by a real estate attorney, and the terms typically range from two to five years.

A portion of the rental money is contributed toward the purchase of the home. On average, renters contribute between 10 and 50 percent of the monthly rental payments toward the purchase of the home. Buyers can sometimes fix the purchase price when establishing the contract. However, most sellers require buyers to purchase the home at the current market value after the lease option expires. Lease option contracts must include legalese that protects both parties in the event of a mortgage default. Buyers generally lose all money purchased if they do not honor the contract. Appropriate legal contracts and careful consideration must be created when entering into this mortgage financing alternative.

Borrowers with prior foreclosures or bankruptcies can find it nearly impossible to qualify for any type of mortgage financing. The only option available might be loans from hard money lenders obtained through private real estate investors or investment groups.

Real estate loans from hard money lenders are expensive and should only be used as a last resort. Hard money loans should be used as interim financing while borrowers rebuild credit. Mortgages should strive to refinance mortgages within 12-18 months. Most 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 go up to 23 percent in some states.