A negative credit history does not necessarily mean that you will not be able to buy a home or qualify for a mortgage. Borrowers with bad credit may qualify for a traditional mortgage with a higher interest rate or may seek alternative financing, including a mortgage from a private lender or a lease option. If you have bad credit, it might be necessary to get creative when trying to buy a home.
Lenders offer various interest rates, which depend on the borrowers' credit score. While a good credit score will result in a lower interest rate, a bad credit score, such as a score in the 500s or 600s, will result in a higher interest rate. That higher rate pushes up the mortgage payment as much as a few hundred dollars monthly, depending on the size of the mortgage.
Private mortgages normally have less stringent credit terms than a traditional mortgage. A private mortgage lender is an individual, a business or a group of investors. The loan proceeds do not come from a bank but instead from the individual, business or investors. The conditions are set out in a private mortgage agreement, which determines the payment terms, whether a prepayment penalty applies, the interest rate and the down payment amount.
If you do not qualify for lender financing or if the terms are unacceptable, owner financing may be another option. Normally, in this situation, there is room for more negotiation over payment terms, the interest rate and the down payment amount. Just like a bank lender, the owner -- who is also the lender -- and the buyer sign a promissory note, and the deed is recorded with the appropriate local agency. In most circumstances, the loan will be for a short term, which allows a borrower with a bad credit history to increase his credit score during the term of the private lending arrangement.s
Lease With Option to Buy
Another alternative to a traditional mortgage is a lease option. A lease option allows a person who is renting a property to obtain an option to buy it at a certain date in the future by paying an up-front payment for the option. An owner might agree to apply the option fee to the down payment amount and may allow the buyer to credit a portion of the monthly payments toward the purchase price. An option is beneficial to a buyer because it allows the buyer to lock in a set purchase price and gives the buyer time to qualify for a traditional mortgage.
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