Things are looking better for our economy, but if you are like millions of Americans who suffered devastating losses in the Great Recession, you may still have rotten credit that's preventing you from buying the home you want. However, all is not lost!
Below is a guide through the actual problem you are facing, and a look at the top four ways to beat the system and buy your next house NOW.
It’s all about your credit score. That is a three digit number that a computer says represents the sum total of your life and determines whether you win or lost at the game of loan applications.
There are several significant ways around your credit score. But first, what IS your credit score?
Answer: It’s a three digit number that is produced by a company named FICO. It supposedly is a predictor of the likelihood that you will pay back money that you borrow today, and it is supposedly based only on five key factors of your credit history:
- Payment history
- Amounts Owed
- Length of Credit History
- New Credit
- Types of Credit Used
You can view your credit score on a daily basis for free on a daily basis at CreditKarma.com. They don’t even ask for a credit card, so you know they aren’t trying to scam you.
So, how do we still buy a house, even with a bad credit score?
FOUR WAYS TO BUY WITH ROTTEN CREDIT:
Owner Finance. Under this scenario, you are looking for a seller who is willing to allow you to buy their house with some amount of cash as a down payment, but instead of you obtaining a traditional loan and making payments to the bank, the seller “carries back” a mortgage on the house and you make monthly payments to the seller for principal plus interest. All the details are open to negotiation. You will need an attorney.
Rent To Own. Sometimes called a lease-purchase, the buyer is not quite ready to purchase, so he rents the house for a period of time and has the option of buying the house under certain terms and conditions at some point in the future. This has the advantage of allowing the buyer to “try out” the house for a year or two or three before making a final decision of whether or not to buy. Once again, you will need an attorney.
FHA Loan. The FHA loan program is widely used by first time home buyers. IT has various plusses and minuses, all of which you need to understand in advance, but the most important feature is that applicants are now required to have a minimum FICO score of only 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent. If your credit score is below 580, however, you aren't necessarily excluded from FHA loan eligibility.
Increase Down Payment. If your credit score is below 580, you can still be considered for approval under the FHA loan program, but you must increase your down payment to at least 10 percent of the purchase price. That may seem like a lot, but the solution is to start saving today, and at the same time start working on improving your credit score. The sooner you start, the closer you will be to your goal of your next new home!
THE BOTTOM LINE: There are real and viable alternatives to needing perfect credit when you want to buy a home to live in. You need to understand the rules of credit scoring and the down payment requirements, but you still have options.
The good news is this: for most Americans, owning their own home is still likely to be the best investment they ever make.
For more information on home mortgages, contact Prime Lending at The McMullen Group.