When it comes to buying a home, having bad credit is not the end of the world. Your future doesn’t have to be defined by your past. Whether you have suffered from a bankruptcy, foreclosure or some type of financial hardship that resulted in late or missed payments, there are lenders who specialize in financing for those with less-than-perfect credit. You will likely have to produce a larger down payment and/or pay higher interest rates than someone who has good credit, but the important thing to know is that buying a home is an option for you.
Bankruptcy & Foreclosure
If either a bankruptcy or foreclosure is on your credit report, it could take some time before you can qualify for a good interest rate on a mortgage. FHA loans, which are especially desirable for those with past credit problems and first-time home buyers, are backed by the government and offer a low down payment and interest rate option for those who qualify. Although the notation remains for up to 10 years, individuals with a bankruptcy or foreclosure on their credit report may qualify for an FHA loan after two years. Some mortgage lenders may approve a loan sooner, but the interest rates will be higher and the required down payment may be as much as 35 percent of the purchase price of the home.
Cleaning Up Your Credit
Even if you have bad credit, it’s important to check your credit report from each of the three major credit reporting agencies – TransUnion, Equifax and Experian – before applying for a loan. If anything is inaccurate, file a dispute with the reporting agency and request a correction. You can request a free copy of your credit report every 12 months.
In addition to correcting any inaccuracies on your credit report, it’s important that you know what can help or hurt your chances of obtaining a loan. You can start improving your credit by avoiding the temptation to apply for new credit right before submitting a mortgage application. Multiple inquiries will cause your FICO score to drop, and lenders will rely on this information when deciding whether or not to issue your loan and how to calculate your interest rates. With past credit problems, most lenders will want to see that you have rebuilt your credit history with 1-3 major credit cards and timely payments over a two-year period.
When it comes to obtaining a home loan, a healthy bottom line will help the lender to see you as being creditworthy. It’s important that you have sufficient income, along with the ability to prove steady employment for at least one year (longer is better) preceding your loan application. Most lenders will request a copy of your tax returns for the two most recent years, along with current pay stubs. If you have money for a down payment, this will also work in your favor.
In some cases, a conventional mortgage loan may not be available no matter how hard you try. Owner financing is one way that individuals, who may not otherwise qualify for a traditional mortgage loan, can purchase a home. This type of financing is offered by the owner and may include interest rates comparable to other loans, flexible down payment options and no credit check. Your REALTOR® can assist you in finding homes that offer alternative financing options.
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80/20 Mortgage Loan
We hear from all the Investor groups about buying properties without any money down. Here is how it is being done. With the price of homes steadily climbing, borrowers are turning increasingly to 100-percent financing and with these home loans mortgage insurance is not part of the deal. In order to buy a home or invest in real estate this the way to go.
The 80/20 mortgage loan is one such loan. With an 80/20 mortgage loan, the home buyer actually takes out two loans. The first part of an 80/20 mortgage loan is for 80 percent of the purchase price. At the second part of an 80/20 mortgage loan is for 20 percent of the home’s price. The closing costs of an 80/20 mortgage loan are something that the buyer is expected to come up.
According to Anthony Hsieh, president of HomeLoanCenter.com, an 80/20 mortgage loan “allows people to buy without a down payment.” An 80/20 mortgage loan is also for people who would rather leave their savings alone in buying a house.
Most people who take on an 80/20 mortgage loans are usually young professionals. Hsieh further describe that these are “people who have gotten out of college and have good jobs.” An 80 20 mortgage loan is for people who have good credit but do not have a lot of savings to their name in order to afford down payments of most homes.
80/20 Mortgage Loans for Renters
80/20 mortgage loans are also targeted to those people who are renters or renting apartments. These types of people can afford monthly rents, the costs of which are roughly about the same as the cost of a home. Because their rent costs are a cycle, at the end of their monthly bills, these people do not have enough funds saved to be able to afford a down payment.
These people may be able to borrow money on loan programs where little or no down payment is required. But to do so, they would have to provide a private mortgage insurance or PMI. If you want to avoid PMI, you can take an 80/20 mortgage loan.
With an 80/20 mortgage loan, you get a “piggyback loan” or second mortgage loan that is used to back up the first mortgage. The first mortgage is comprised of 80 percent of the home’s price. The second loan is only for 20 percent minus the down payment.
Second Mortgage spells higher rates
In most cases, the interest rate of the second loan of an 80 20 mortgage loan is higher that first. However, if you combine the two payments in an 80 20 mortgage loan, you get lower costs.
You can see evidence of this just by comparing the cost of an 80 20 mortgage loan with the cost of a regular loan with PMI. The 80/20 mortgage loan usually costs less each month.
80/20 mortgage loans are structured by lenders in several ways. Some lending companies structure their 80/20 mortgage loan with the first loan having a 5/1 ARM payment. This means that the 80 20 mortgage loan has a fixed rate for the first five years. However after the initial five years, the payment for the 80 20 mortgage loan interest rates is adjusted annually.
Others structure their 80/20 mortgage loans in a slight different way. 80/20 mortgage loans have the 20 percent piggyback dependent on the prime rate. The 80 percent of the 80/20 mortgage loan can be a fixed rate, adjustable, or interest-only.
80/20 loans are not as complicated as people may think. Many lenders will only finance 80% of the home purchase price, which leaves 20% for the borrowers to come up with. While having a down payment is ideal, some borrowers do not have enough of a down payment to cover 20%, and some may not have a down payment at all. In this scenario, a second loan for 20% of the home value can be taken out, as a home equity or piggyback loan. This is the best way to get 100% financing because neither the 80 or the 20 loan will require a down payment, since they are both incomplete loans.
How They Work
The first loan is for 80% of the purchase price. The second loan, for 20% of the purchase price, works as a revolving line of credit for 15 years and then must be paid in full over the course of the last 10 years of the loan term. The first loan prevents the borrowers from having to take out a private mortgage insurance (PMI) policy, which helps them save money. PMI is usually required when any mortgage covers more than 80% of the home value, because it is a risk for the bank. The insurance works to protect the bank, but since the cost is passed on to the borrower, it makes it harder for the borrower to handle.
When a borrower cannot come up with 20% down, an 80/20 loan is usually the best route to go, because it is less expensive than having to carry PMI. The 20% loan will generally carry a higher interest rate than the first trust deed loan, so it is important to carefully manage finances.
Qualifying for an 80/20 Loan
Generally, only those with a good credit standing, a score of at least 700, can qualify for 80/20 loans. Because there is no down payment involved, 100% financing is a very large risk for most lenders, so they will only trust borrowers who have shown they have the ability to pay their debts. In addition to a good credit history, applicants should have a stable employment history, a decent amount of money in savings, a stable history of residency, and a low debt-to-income ratio (DTI). The debt-to-income ratio should be 45% or less if possible. The better the employment, residency and DTI are, the lower the interest rates on the loans will be.
Due to the recent housing industry crisis, these loans are only extended to the most worthy borrowers, and are not offered by all lenders. If you are interested in getting 100% financing through an 80/20 loan, look at your credit report before you begin talking to various lenders to find a program that works for you. Depending on the situation, you may be better off waiting for a few more months to improve your credit and pay down some debt.
Unfortunately, fraud and identity theft are increasing at an alarming rate every year, and mortgage fraud is one of the most important types of fraud from which you will want to protect yourself. So what constitutes mortgage fraud, and how can you prevent this from happening to you?
What Is Mortgage Fraud?
Essentially, mortgage fraud is defined by the FBI as any material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan. There are several different types of mortgage fraud, and each is a serious offense that can have a huge impact on you and your credit. Here is a basic list of the most common types of mortgage fraud.
Undisclosed Kickbacks-This includes any financial deals between a buyer and seller that are not included in the mortgage documents.
Falsifying Income-Inflating your income is a serious offense on any loan document, especially a mortgage.
Undocumented Non-Owner Occupancy-Rates and other fees can be higher for income and rental properties, but resist the temptation to hide this fact in order to save money.
Inflated Purchase Price-In some cases this method is used to obtain a higher appraisal of a property, but it is illegal and may cost you your home.
How To Protect Yourself
The purchase of your home will probably be the greatest financial investment you will ever make. Ensuring that you know what constitutes mortgage fraud is half the job, but it is also important to know how to protect yourself from professionals who may not have your best interests in mind. In general the best method is to ensure that your real estate agent and mortgage lenders are professionals with considerable experience, professional credentials, and good references. It is also important to keep in mind that if an offer seems too good to be true, or if you feel that your REALTOR® or lender has given you advice that sounds as if it might fall under the category of mortgage fraud, you seek the advice of another professional. In this way you can avoid getting yourself into what may be a potential financial disaster.
Your property is not only your home, but also your greatest asset, and losing it to mortgage fraud can be avoided when you are armed with these facts.