How To Get A Mortgage Loan For Poor Credit
Learn all about how to get a mortgage for poor credit. There are four major ways to get a mortgage or a home with poor credit. The ways are: hard money loan, FHA insured loan, seller financed mortgage and lease option. The poor credit mortgages all have benefits and disadvantages and the borrower should investigate them all thoroughly before deciding which one to choose.
- Hard Money Lenders - Lifeline for Needy Borrowers. Hard money lenders are usually private investors looking to loan money to borrowers who cannot get a loan elsewhere. The points and the interest rates they charge are generally very high. Almost always hard money lenders will charge double digits for interest rates and the points are higher also. These are temporary loans to help you get out of a bad situation, such as a foreclosure or to buy a very expensive home that you just have to have. These are usually private lenders who will only loan on homes where there is sufficient equity, such as 35 to 50%. Hard money lenders always want to be in first position and never will accept to be a second trust deed holder. The hard money lender wants to know if the borrower defaults that the home can be still sold with a profit.
- FHA Insured Mortgages - One of the Best Deals for Poor Credit Borrowers. FHA insured loans also cater to the poor credit borrower who has explanations. They will loan to borrowers with low FICO (credit) scores and only require a 3.5% down payment. Keep in mind that although they are very generous in their guidelines they do require adequate explanations for the delinquencies. Here are a few of their guidelines and restrictions: FHA will loan to borrowers who have a credit score of 540 and above. FHA will loan to borrowers two years after a bankruptcy. FHA will loan to borrowers three years after a foreclosure. LTV (loan to value) ratios are higher with an FHA loan. Gift is allowed to help borrower with down payment and closing cost. Seller can pay closing cost for the borrower.
- Seller Financing is Generally Better Than Hard Money Loans. With the revival of seller financing in many areas of the country, poor credit borrowers have been given a third option. Sellers offering this type of financing will generally charge a higher interest rate than conventional loans. This higher interest rate is usually 1/2 to 1 percent more. Closing costs are minimal as the seller is the mortgage company and the closing cost will consist of minor escrow and title fees only. The seller will arrange with the escrow company in many cases to handle an escrow account where the borrower deposits their monthly payment and in exchange the seller gives them free use of their new home. The title is held by a third party and after the loan is paid in full the title is transferred. With this type of poor credit financing, the seller will not require the buyer to refinance the home or have a balloon payment. The buyer does have the right to refinance the property if he wants.
- Lease Option or Rent-to-Own. This type of poor credit financing is one of the easiest to do, but one with many disadvantages. The borrower agrees on a set amount to pay for the home and the seller sets a date when the borrower must refinance the home. If the borrower has poor credit to begin with, establishing a date to refinance may be difficult to foresee. The buyer has no rights to the property other than as a renter until he refinances the home. He pays monthly rent, plus an amount towards the down payment. It is imperative to keep accurate records for the bank when it is time to refinance. It is also important to have the property appraised before agreeing to a lease option. A lease option can be a gift from heaven for many borrowers though.