How to Secure Home Finance With Sub-Standard Credit: Surveying The Field
The American housing market is slowly coming out of a cold dark winter, but nobody should be fooled by the slightly optimistic figures. It is going to take a while before housing returns to pre-2008 figures.
The economy has also done considerable harm to people who were not able to pay debts on time. These unfortunates were punished with low credit scores and that makes getting loans difficult, particularly mortgages. This doesn’t mean that owning a home is going to be impossible. It does mean that many times the road less traveled will be the only highway.
People can secure the needed financing by being creative. Lower mortgage rates can be had if
the down payment is large enough, and getting a sizable down payment may be the way to go.
The simplest approach would be to save more money, but current demands might make saving
for a down payment very difficult, besides being a long-term process.
A person with a low credit score can increase the size of the down payment by taking out an unsecured loan. This means there is no collateral involved; something a bank would never do but a family member might. A parent or relative may be willing to provide the money necessary for a large down payment on
a house. The buyer has keep in mind that he or she is dealing with a family member and not a
stranger. Failure to pay back a family member can result in bad blood that lasts for decades. This
kind of a loan ought to be paid back as quickly as possible.
Some credit card companies will provide for cash advances, and the sums are large enough to be
considered for down payment. This is an option, but it is a highly risky one and should only be
attempted if other options are not viable.
The question of the down payment can also be resolved by entering into a rent to own agreement with an existing homeowner. Part of the rent in this circumstance goes to the down payment on the house, helping the prospective buyer to better negotiate reasonable interest rates on a mortgage loan.
There still remains a conventional means of handling the down payment and that is through
the Federal Housing Administration (FHA). The FHA guidelines for a mortgage loan permits a
3.5% down payment for a credit score of 580. Perhaps as important is the ability of an FHA loan
itself to be assumed. If a prospective buyer is able to deal with someone already possessing an
FHA loan, the one who owns the loan can transfer it, relieving the other of having to go through
the process of applying for an entirely new mortgage. This is great for a buyer with poor credit
ratings but it has to be remembered, however, that the individual has to have FHA approval first.
In other words, the new buyer has to formally apply with the FHA, and be approved. This of
course means being able to prove that poor financial habits are a thing of the past, and the new
buyer has proven to be fiscally stable.
It should be clear by now to anyone that a person with poor credit rating can acquire a down
payment large enough to secure agreeable interest rates. Yet, there is still a need for fiscal
maturity. All of the above options have consequences for nonpayment. Defaulting on debt to
a bank is one thing, doing the same thing to a relative is something else and emotionally more
Deals made with other people can require considerable amount of trust, and failure to
make rent payments can result in forfeiting any accumulated down payment. The risks have to
be carefully assessed. That being said, securing a sizable down payment or qualifying for an
FHA mortgage loan that needs only a small amount can help a poor credit risk achieve a good
mortgage interest rate. A person with bad credit scores must at least ponder these other means to
the housing end.
JD is a contributor with Home Star Search, a database of available rent to own housing options. JD is a real estate enthusiast and a personal finance mentor.