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Your income and credit rating used to be the two most significant factors for getting approved for a mortgage.
However, house buying trends have changed after the latest United States Housing Bubble collapsed in 2007.
Now both of these factors are no longer considered to be the only deciding factors for people looking to buy a home.
Now more than ever before, there's a growing need for home loan options for people who have bad credit or trouble getting approved for a typical mortgage. Many self employed people fall directly into this category sometimes involuntarily, so we decided to take on the task of helping anyone buy a home regardless of their credit scores or employment status.
The bottom line is that as long as you can afford to rent, you will be able to buy a home using one of the options we describe below. The only thing we ask for in return for this one stop shop of information you need, is that you do us a favor and share it on the internet or with your friends or family using Facebook, Twitter, Pinterest or any other social sharing platform. Think of sharing this article as your Good Deed for the Day. Now let's get you informed about how you're going to buy your home!
Every lender has their own set of standards based on which they lend mortgage loans to applicants. You will find many mortgage lenders online who deal in lending mortgages to people with bad credit history. The only thing one must be careful about is not to sign on for a high interest rate loan. It is obvious that a mortgage lender who is willing to offer home loans to those with bad credit will charge higher than the average interest rates, but you can negotiate the terms to keep the interest on your mortgage as low as possible. So remember to negotiate and shop around.
Besides home mortgages, there are other loan options for the self-employed or people with fair to poor credit scores.
1. Home Equity Loans:
Equity loans are suitable loan options for people with fair to bad credit ratings that are looking to buy a house. These loans may help improve your credit ratings and the interest you're going to be paying off is tax deductible.
Typically a home equity loan is based on an existing house or security that you put up as collateral to secure the loan. The major drawback is that if you fail to pay the loan, the bank can take possession of the house or whatever collateral that you borrowed against.
After the recent housing bubble bad credit home equity loans for first lien loans (home purchase) became very popular options for many borrowers, but they're not the only option available to you. Of course the biggest negative about equity loans is that you already have to have a home to borrow against.
2. Sellers willing to do a Lease Option aka Rent-to-Own Option:
Many home buyers with bad credit or the inability to qualify for a regular mortgage find the rent-to-own home buying option very attractive. In this scenario, usually the seller of the house purchased a new home and is stuck carrying the cost of two mortgages. Not many people can afford to pay off two mortgages at once, so many sellers will be willing to work with you with this type of arrangement, since it will get them out of a jam as well.
The sellers offer their property to buyers with a rent-to-own option or commonly known as a Lease Option to increase their pool of available buyers for their old house. This makes it much easier for buyers to get into a house they want, without the hassle of applying for a regular mortgage using their income history and credit scores.
The Lease Option can be started by the buyer or seller. You can ask a real-estate agent for a contract or to help you develop a custom Rent-to-Own contract. Typically the seller establishes a contract (that can be altered) which discusses the lease option process and fees. First the sellers and buyers both have to agree on the sale price of the house. This sale price will become locked in until then end of the rental term, which is typically between 1 to 3 years. Next is the setting of the Option Fee and Rent Premium Fee. The option fee is usually in the thousands and it will be used in your down payment if you decide to exercise your option to purchase the house after the rental term is done. Think of the lease option like a car lease. The rent premium is the going home rental rate plus a few hundred dollars as rental credit that will also be accumulated towards your down payment along with the option fee. Let's do a quick example below to clarify this loan opportunity.
Let's say the house you are buying is $250,000. The going rate in the neighborhood for rent is $1,200. The seller asks for $5,000 upfront for the Option Fee, which will count towards your down payment and $1,500 for the Rent Premium Fee. $300 each month from the rent premium fee will accumulate towards your down payment, this is called a Rent Credit. Now let's say that the rental term is 3 years, in that time you will have accumulated $10,800 in Rent Credits and add to that the $5,000 Option Fee. Your total down payment will be $15,800 when you're ready to buy.
What do you do when it's time to buy? You can try securing a regular mortgage at that time if your credit improved, or you can work out a deal with the seller where you pay mortgage payments to them. There's positive and negatives on both sides in this type of arrangement, but with this option your bad credit rating or self-employment history will not be a problem.
3. Standard Mortgages & FHA Loans
If you shop around you will find mortgage lenders and loan companies that are willing to lend to people who have low credit scores or who have trouble acquiring mortgages because they're self employed. If your credit scores are above 500, you can look into an FHA loan program for first time home buyers.
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They allow you to get into a home with as little as 3.5% down and some of the lowest interest rates available. If you don't qualify for an FHA mortgage you can look into companies that lend to people with low credit score, but they might want to charge you higher interest rates. Just make sure that you negotiate the terms as much in your favor as possible, and definitely investigate the company record with the Better Business Bureau and a local consumer protections agency if your state has one.
So you may think you're in a tough situation, but we're hear to tell you that the situation is not impossible. You can definitely buy a house this year, but the terms may be slightly different than what you were expecting. Many self employed people find out the hard way that the money they have been writing off in taxes is working against them when their applying for a mortgage. Many of those same people cannot qualify for the mortgage at all unless they have 50% of the house value in the bank already. The good news is that by using some of the options discussed in this article, no matter your credit scores or employment history, you can buy a house as long as you can afford the monthly payments.
Lastly keep in mind that sellers maybe more willing to work with you than you may realize, because they don't want to get stuck carrying two mortgages on their own.
