If you’re one of the many who has experienced a rough patch similar to the one described above, you shouldn’t give up hope. It’s still entirely possible for you to buy a home – even if your credit score remains less than admirable. Whether your credit fell because of a foreclosure or due to another reason such as bankruptcy, you should know that bad credit itself doesn’t immediately disqualify you from landing a new mortgage loan. Read on to learn more

Why so many have been left with bad credit

The toxic mortgage crisis has left thousands of people in a tough situation:  kicked out of their houses due to foreclosure and with bad credit to boot. If you’ve recently gone through foreclosure or have had to sell your home on what’s known as a “short sale,” you’ve likely experienced a dramatic dip in your credit score.

Though the reasons behind a foreclosure may vary from household to household, most situations have to do with individuals who got in over their heads when it came to mortgage loans. They were able to take out loans they either didn’t understand or for which they didn’t properly qualify. Then, all too often, those individuals found themselves upside down on their loans – a case where they owed more on their loans than their homes were worth. Such cases often lead to foreclosure which, in turn, can dramatically hurt a person’s credit score.

Know your options

First of all, it’s important to move forward with a positive attitude. Move past your fears and know that bad credit in itself doesn’t mean you can’t find a new home to suit yours and your family’s needs.

On the contrary, there are absolutely ways for you to purchase a home – just know that you’ll likely pay more than a mortgage loan applicant who has excellent credit. Because of this, you should start off by inquiring around to see which mortgage lenders offer loans to those with less than stellar credit.

Start looking at lender possibilities

Begin by calling around to different banks and lenders to ask their policies on loans for individuals who currently have bad credit (note that the keyword here is currently – bad credit is not a lifelong curse, and you will eventually find your way back up to a high score).

Keep track of all the rate quotes you’re offered and begin meeting with those lenders who offer the lowest rates for people in your situation. Find out which lenders are willing to pre-qualify you so you can begin shopping for your new home.

Consider alternatives to bank-financing

If you aren’t able to find a lender who offers you a satisfactory rate on a loan, consider an alternative to bank financing. One option to explore is seller financing in the form of a land contract.

Another viable alternative is to take out a land contract. Also known as an “installment sales contract” or a “contract for deed,” such options were quite common between thirty and forty years ago.

Land contracts essentially offer better financing terms over high rates and do not require that you conform to the strict standards imposed by most institutional lenders. Land contracts slowed in popularity when loan standards eased and interest rates fell below 8%, but they are quickly regaining speed.

Understanding land contracts

In a nutshell, a land contract is an agreement between a seller and a buyer wherein the seller agrees to finance the purchase for the buyer. The seller then retains legal title to the home and the buyer receives what’s known as “equitable title.” 

Once the buyer has paid the loan in full to the seller, the seller signs over the deed to the property.

In many cases, the seller can require the buyer to pay a higher interest rate than the rate on the original loan. This allows the seller to meet the underlying lender’s payment and to pocket the rest.

Refinancing a loan will provide you with additional savings

If you were to take out a land contract and make payments on it over several years, chances are your own credit rating would steadily rise. When this happens, you will have the opportunity to refinance the loan you’re paying on to stay in your house.

You can also do this if you originally were able to take out your own high interest loan. By refinancing, you’ll be able to lower your overall interest rate in order to save money on future payments.

Why it’s important to take action NOW

Mortgage interest rates are at all-time historical lows and home prices have dipped considerably. Because of this, now is the ideal time for you to begin shopping for a home. Even though you’ll pay more than someone who has higher credit than you do, you’ll likely pay a lot less than you would if you wait a few years for your credit score to improve. If you do choose to wait, you risk watching both home prices and mortgage interest rates climb.