Just because you have a low credit score doesn’t mean you can’t get a home loan, However, the interest rate on the loan may be so high that you never own the residence outright. This could trap you in vicious cycle that every homeowner fears: making monthly interest payments on the loan without reducing the principal. When this happens, it’s almost as if homeowners are renters since they’re paying for to occupy a home that they have a slim chance of ever owning free and clear.
What is a Low Credit Score?
According to Marketing Guard — a website that reports on trends and changes in credit reporting — credit scores can range from 300 to 850 points depending on the score system. In all cases, the higher the number, the better the score.
When buying a home, a high credit score can end up costing you significantly less in loan payments over the course of the loan, regardless of its duration. Before we go any further, though, let’s define good and bad credit by taking a look at the credit score spectrum from top to bottom. The following numbers are courtesy of Marketing Guard.
1. Excellent / very good credit score: 700 to 850
2. Good credit score: 680 to 699
3. Average / OK credit score: 620 to 679
4. Low credit score: 580 to 619
5. Poor credit score: 500 to 579
6. Bad credit score: 300 to 499
The lower your credit score, the more likely you are to have problems getting approved for a loan to buy a home or a business, particularly a loan whose low interest rate helps mitigate payments. So, what are your options? One of them is applying for a home loan through a credit union — an organization that is typically likelier than a traditional bank to offer attractive loan interest rates to low credit score applicants. Another option is pursuing seller financing.
Let’s take a look at each option in terms of how to buy a house with low credit, and discuss benefits and drawbacks from the perspective of the homebuyer.
Using a Credit Union Loan
For people who have less than stellar credit, receiving a loan from a credit union is often easier than acquiring a loan from a conventional bank. Large banks are essentially owned by shareholders, and they’re the ones a bank needs to please in order to keep its stock from tanking. Consequently, many banks only approve loans to people who have credit scores in the upper range.
Many credit unions don’t have shareholders to consider, which explains why they are often said to be “owned by their customers”. While this isn’t exactly true when it comes to receiving a home loan (a loan specialist or group of directors makes the decision), one thing is certain: Homebuyers who have low income scores stand to receive a beneficial loan based on their current financial position than they would if they pursued financing through a retail bank.
Using Seller Financed Loan
If you need to buy a house with low credit, using seller based financing may be the best option. In a seller based financing agreement, the homebuyer receives financing from the home seller.
The seller establishes an interest rate for the loan, sets the payback period, and defines special considerations that he or she would like to have worded in the sale agreement, such as an escalation clause that increases interest to offset inflation, or an early termination agreement that kicks in if the seller doesn’t make mortgage payments on time for an extended period.
Need a Loan on Low Credit?
Trying to buy a house with low credit can result in disappointment after disappointment, as your loan applications may face repeated rejection. Or, even worse, you may be offered terms that seem like they were devised by a “loan shark”.
Raising your credit score will you avoid these obstacles. However, if you need to move into a new home quickly, pursuing a seller financed mortgage should be at the top of your list for home financing options. Checking your local credit unions to see of they have buy a house with low credit program is a good idea, too.
Who We Are
Amerinote Xchange is a loan acquisition firm located in sunny California. As a principal note buyer one of our primary specialties is acquiring and maintaining residential and commercial mortgage notes.
If you provide seller-based financing, you have the chance to sell your mortgage note partially of fully for a lump sum payment. To find out more about this option and other benefits of seller financing, please call us today at (800) 698-3650, or use the contact form on our website.