Beginning in 2009, bad credit home loans reached near extinction as banks were reeling over billions of dollars in losses from millions of home loans during the boom of 2006 and subsequent fallout beginning in 2007.
And even nowadays foreclosure rates show no signs of slowing down and banks show no signs of releasing a stranglehold on new loan approvals. Proverbial purse strings tightened and banks are saying “no.”
What exactly is “bad credit”?
In the world of mortgages and home loans and home buying, bad credit is anything below a 680 credit score. Any report with recent collection activity or late payments or bankruptcies not discharged for two or more years is an automatic “no” in the world of mortgages.
How do I find my credit score?
Everyone is entitled to a free copy of his or her credit report each year, however, this report does not include a buyer’s credit (FICO) score; the buyer will have to pay for that. Visit www.annualcreditreport.com to obtain your free report and information on getting your score.
What is seller financing?
Seller financing is a tool used by sellers and real estate investors to help challenged credit homebuyers. Instead of getting a loan from a traditional bank or mortgage broker, the seller is the bank.
Make no mistake, the seller is in this to make money, this is not a philanthropic effort by any means, but seller financing is a great way for a bad credit buyer to purchase a house.
How does seller financing work?
The seller is able to establish the “rules” for the loan. The seller gets to call the down payment, interest and loan term. The seller is in the driver’s seat. This can mean expensive consequences for the borrower.
The typical down payment for a seller-financed property is no less than 15 percent of the purchase price.
For example, if a home is on the market for $125,000 the borrower needs a down payment of $18,750 in order to qualify for the loan.
The interest on a seller financed home is also normally higher than one would find using a traditional lending source and can be as high as 12 percent annually.
Overall, bad credit home loans are an expensive proposition.
If the terms are so bad why use seller financing?
For three reasons:
- You get to write off all of the interest paid to your mortgage on your income tax return, just like any other mortgage.
- You get to write off a portion of your down payment on your income tax return.
- Your mortgage can build credit, helping you refinance to a traditional loan or purchase another house in as little as two years.
When comparing apples to apples, or in this case renting to buying, seller financing makes sense in contrast to throwing money away on high dollar rent payments.
For buyers considering seller financing, they need only remember two magic words: money talks.
The more money you can provide to the seller up front as a down payment, the more equity you build up front, and the easier (and more favorable) the terms will be for a seller-financed loan.
For more information on seller financing, or to find out about seller financing in your area, contact your local board of Realtors.