Options For People Seeking A Home Loan With Bad Credit

Posted by Nick Niesen on October 29th, 2010

Home Loan Options for Buyers with Bad Credit

If you haven?t attempted to obtain a mortgage, say since the 1990?s you may be surprised to find that the standards for lending have undergone a significant change. Where it was once virtually impossible to get a home loan if your credit wasn?t spotless, it is now a distinct possibility. These bad credit or sub prime home loans come at a stiff price to the borrower though and may, in some cases, not be worth the eventual price that will be paid.

A bad credit home loan will require a larger down payment and will charge a much higher interest rate. What this means to the borrower is that over the life of the loan they may purchase the home several times over, paying as much as triple what a prime loan candidate would. At the moment the average interest rate is 6% for a 30 year fixed rate home loan. For bad credit the rates would be in the area of 10% with the same terms. A $100,000 dollar loan at 6% interest and 100% financing would ultimately cost the borrower a little over $215,000. The same loan at 10% interest would cost an additional $100,000, in other words, another house. Not only is the overall payment much higher but also the difference in monthly payments is nearly $300. Imagine the difference $300 can make in your family budget. My point is that it may be in your best interest to work on repairing your credit before obtaining financing.

This brings me to my next suggestion. Perhaps it would be a good idea to look into a lease option or contract rather than obtaining traditional financing for your home loan. This will allow a portion of your payment, plus the option fee to go towards your down payment at the end of your designated option and allow you the time to work on your credit. It only takes a consistent effort for 6 months with no delinquencies to dramatically improve your credit score. I?m not saying this will fix your credit completely, but lenders look at the effort and a lease option traditionally gives you 2-5 years to get the financing you would need for your home as well as a steady escrow account to go towards your down payment (another thing lenders like to see).

Remember that while home loans are available to those with bad credit, they aren?t necessarily good for you as the buyer. They come with a very high price, especially if your finances are stretched thin to begin with. If you?re currently living in an apartment and looking at buying a home, you have to keep in mind that certain expenses will be greater in a home and some expenses that are covered by apartment communities (sometimes water, gas, and cable) these will be your responsibility in a home. So you need to have a budget in place that you can live with. If you don?t allow money in your budget for clothes, medicine, time off work, and occasional entertainment and you are stretched thin by your potential budget it probably isn?t a good time for you to buy a home. Also you need to have savings to cover emergencies. The problem is that most people who have bad or poor credit don?t have the disposable money or the savings (if they did you would think that they would not have bad credit).

So please be careful that you don?t get in over your head financially in pursuit of the American dream of home ownership. You could very well find yourself drowning in your own debt without any sort of safety net. You could lose your home if you aren?t careful or find yourself in a situation where you must sell your home and bail out of your financial trouble.