Buying property, to this day, is a central part of the American Dream. Whether you have your eye on a studio condominium or a three-family investment property, or you want to buy rental property for additional income, it is a big and exciting step in your life.
Home ownership can be intimidating, especially if it is your first time. The process is relatively straightforward, but there are a few factors that can complicate issues when you want to buy property -- one of the main ones being a low credit score. A low score, a track record of collection accounts, or indications of late or errant payments can make it difficult to get an attractive loan -- and in some instances, difficult to obtain a loan at all.
Here are some tips on how to buy real estate if you have poor credit:
- Know your credit score. Your mortgage broker will use your Social Security number to obtain your credit score. It may not be as bad as you think.
- Clean up. Although paying back old debt and eliminating mistakes on your score will not impact your ability to purchase a home on the spot, it is a good idea for the future. Some brokers and federal programs will overlook credit issues if you provide an explanation or if the credit issue was not your fault. When you refinance your loan in a year's time, your credit will again play a factor, so clean up!
- Seek financing from a private party. In some instances you can seek a loan from a private company or a family member. As long as the seller of the property is okay with this arrangement, and he may not be in most instances, you can buy the home.
- Seek financing from the seller. In some instances, particularly if the seller knows you and trusts that you can pay back the debt, he or she will finance your loan. Instead of paying the bank each month, you send a check to the seller for an agreed-upon amount. They will charge interest on your loan, but it may be a more attractive rate than any conventional mortgage you could get.
- Large down payment. It's always best to have a large down payment. Your ability to get a loan depends on a few things, including your credit, your debt and ability to pay it off, your employment, or cash in, and the amount you will be putting down toward purchase. The higher this amount, the lower your financing rate will be. If you can borrow money or get it gifted to you several months before you think you will be making a purchase, do so. Most banks will not consider gifted money part of your loan package unless it is gifted several months prior to your offer and purchase.
- Investigate federal mortgage programs. FHA loans are available for buyers with bad credit and/or limited funds. In this instance, the HUD, not a private bank, will fund you. The rates and points can be lower because unlike a conventional loan, FHA loans do not place the highest premium on excellent credit. Unlike conventional loans, you may be gifted an amount for your down payment from a family member or non-profit organization.
- Get a co-signer. If your credit is poor, you can find a co-signer with good credit. By agreeing to sign, the co-signer is both vouching for your ability to pay, and sharing the responsibility. Should you fail to pay back the money the bank can go after your co-signer.
- Compare rates. It is always recommended that you compare rates with several banks and lending institutions. Inquire about special programs for people who are mending credit reports. Banks that cannot serve you may be able to refer you to another that will gladly work with you.
Don't be afraid to buy a house, or any property, if you have poor credit. Buying a home is a special experience that everyone should get to enjoy. If you work hard, you can overcome your credit history. Good luck!