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How to Buy a House with Damaged Credit: 3 Options Worth Considering, by Jared Diamond from Home Star Search

Sun, Aug 19, 2012

Home, Lifestyle, Money

Perhaps the cruelest blow inflicted by the Great Recession of 2008 was on the dreams of many people. Not only did the housing industry come crashing down, but the credit ratings of quite a few honest folk were ravaged. The disaster seemed to take away the possibility of ever owning a home. Considerable effort to improve credit scores has been exerted by many but low figures still persist. Some people are on the verge of giving up on the idea of ever owning a house, but that should not be. A person with a less than stellar credit rating can still purchase a home. It does mean that other options than the conventional mortgage must be considered.

An immediate possibility is dealing with the owner of a house. An arrangement known as “owner will hold note” creates a situation where the owner of the house still holds the
mortgage, but has the purchaser pay for it in monthly installments. This is a situation that can arise when an owner is on the verge of foreclosing and cannot readily sell the house. It means that the owner in a sense becomes the bank. This is a very, very, risky transaction. The owner sets the terms and purchaser has to agree to it. While this is option, the purchaser ought to have a real estate attorney look over the terms to make certain that there are no hidden clauses that can create greater financial problems.

Another alternative that is quite viable is rent to own. The owner of the house offers an option to buy and permits part of the rent to be used as a down payment on the house. This means that the renters are able to lock in the price of a home which he or she will then purchase a few years later. There is a risk to this option as well. The renter has to make certain that he or she can pay the rent every single month, and that ordinary maintenance costs are the responsibility of the landlord/owner of the property. Some provision may have to be made in the event that the owner should foreclose, and that ought to be part of the lease negotiation.

The Federal Housing Administration (FHA) continues to be an avenue down which a person can go for a house loan. FHA approval can help even a person with poor credit rating secure
reasonable interest rates. The caution here is a person has to be deemed eligible for such federal assistance and also have the financial wherewithal to meet any requirements. Nevertheless, this is a very attractive option for anyone with low credit rating.

One might think that a bank wouldn’t even look at a person with low credit scores but that is not always true. Banks will in certain situations take a serious look at someone who may
ordinarily not be approved for a loan. Those financial institutions that have a number of vacant properties on the books may be willing to take a risk in order to turn these abandoned houses into moneymakers. As with the other possibilities, a prospective buyer has to be able to afford the monthly payments and assure the other party those payments can be made on a timely basis.

It must be noted that none of these options are a gift to anyone. A buyer must put his or her financial house in order so that payments can be made. A great deal of attention is going to
be placed on the ability to make prompt payments. There may be penalties for late payments, and these can be large for somebody whose prior activity has resulted in low credit scores.
That being said, anyone who believes that a poor credit rating means no chance of applying is operating under a false assumption. It is still possible for someone with a low credit score to buy a house. It just means investigating options that are not often considered.

Jared Diamond is a contributor from Home Star Search, a leading database of homestarsearch.com to own homes. Jared enjoys writing on topics pertaining to real estate as well as personal finance.

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