Buying a home is a stressful process. It can be even more stressful for those individuals and families that have bad credit and may struggle to find a mortgage broker that is willing to work with them – or to find a broker that will not charge extreme rates of interest on the loan.
Repairing bad credit can take years of diligent work, but it is possible for people to buy a home if their credit is less than stellar, and for them to avoid predatory rates of interest.
Buying a Home: What’s Involved, Financially
The first step in buying a home is understanding the finances involved, knowing what you need to buy a house. People need to look at their finances honestly and determine how much they can pay a month, what they have available for a down payment, and that they will be able to pay for any required maintenance or repairs and taxes.
They should also obtain a copy of their credit report so they can be prepared for meetings with banks and brokers and be proactive about getting approved for a mortgage, since these groups will look at credit reports critically.
People that have filed for bankruptcy may wish to delay purchasing a home until the bankruptcy is removed from their credit report, which is generally after 10 years. There are a number of lenders that do work with people that have filed for bankruptcy, but they do this by shortening the length of the loan and/or increasing the interest rates.
Repairing Your Credit Before Buying a Home
No matter how bad a credit score is, it is possible to begin repairing it. If a person is able to demonstrate to a lender that they are taking steps to improve their credit and can be trusted to repay the loan as agreed, they can often qualify for a lower rate of interest or more favorable loan terms.
Repairing credit can be accomplished through a number of methods, most of which are relatively straightforward. All debts and credit cards need to be paid as agreed and in a timely manner. If possible, people can open new credit card accounts with the sole purpose of rebuilding credit; as long as they pay those cards off every month and do not accrue interest or miss a payment.
Consider Foreclosures and Similar Cheaper Options
Anyone looking to buy a home with low credit should also consider buying homes that have been put up for auction after foreclosure proceedings. These foreclosed homes (or pre-foreclosed homes) are often much less expensive than other ones, so the buyer will not require as large of a mortgage. Owing less money means that even if the interest rate on the loan is high, the borrower may save money over a traditional home purchase and be able to pay it off much quicker.
Another method to buying a home with bad credit is to have as large a down payment as possible, or even to pay cash for a home if at all possible. This will minimize or eliminate the need for long mortgages with higher interest rates and save money in the long run. This principle is especially true for people that have bad credit and are subject to higher interest rates.
It may be possible for people buying a home with bad credit to renegotiate the terms of an existing mortgage after a number of years if they can demonstrate a better credit rating. This means that even if the initial terms of the loan are less than ideal, the owner can try to get better terms by showing their improved financial status and ability to pay on time. This may mean better interest rates or more leverage in negotiating the length of the loan and the conditions.