Options when Credit Scores Remain Low
Some potential home buyers have had to file for bankruptcy for health, work related or other economic reasons. This does not mean that it is impossible for them to secure a mortgage loan. While they face challenges that potential buyers without these issues do not have to deal with, it can be beneficial to explore some of the possibilities.
One of the first things that buyers need to know is what the various rules are as they apply to various mortgage programs. For example, the FHA allows borrowers to have a credit score as low as 600 if they make a larger down payment even if they have had a bankruptcy. Bankruptcies must generally be discharged for 24 months before applying for an FHA mortgage. Some other options include:
Seller financing: Sellers who are motivated to sell their home may be willing to work with a home buyer to provide some financing. This can be a very effective method of not only improving a credit score but also getting the house of your dreams. Seller financing can be for the entire mortgage amount or a portion of the mortgage. Before using this method, it is important to meet with any additional lenders who you may consider using as there may be restrictions for this type of financing;
Rent with option: Another great method of building credit and still getting the home of your dreams is to rent with an option to buy. Those considering this method of home buying will not only be building their credit, but may also be building equity in the home. Those who use this method of dealing with fair credit for a home mortgage must be aware of the downsides. When the home buyer (e.g., the renter) decides to go for a more traditional loan, the portion of their monthly rent that is over and above "fair market rent" for the area will be the only amount used for the calculation of their down payment. This can be challenging for those who are living on a very tight budget and do not have a lot of additional resources;
Co-mortgagee: Home buyers who are struggling to get their credit scores higher may also consider a co-mortgagee. This may be a friend, family member or spouse who is trustworthy. This may be an extreme measure but in some cases, this allows the home buyer to get the home of their dreams and build up their credit score at the same time. It is important to remember that since the lender will still consider both credit scores in making their final determination, there may be a requirement for a higher down payment and you may pay a higher interest rate for a loan;
Sub-prime mortgage: While sub-prime mortgages have gotten a bad rap in the media and from the government, this does not mean they are 100 percent evil. In fact, potential home owners who take the time to carefully review the paperwork with a sub-prime mortgage and work closely with a reputable mortgage broker may find that this method of financing a mortgage is right for them. Sub-prime mortgages that have unusual restrictions on prepayment, balloon payments or severe interest rate spikes should not be used. However, there are fixed rate sub-prime mortgages that often do not contain prepayment clauses that can help a potential homeowner get on the right path to not only home ownership but also to mending their weak credit.