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How to Buy a Home with Bad Credit

Your credit scores plays a key role in the number of and type of financing options that are available to you to purchase a home. While bad credit doesn't necessarily disqualify you from purchasing a home, your financing options may be scarce if your credit score is below 600 and the financing that is available could be quite costly. Certain financing programs and home purchasing options are available in Connecticut to help those with less than perfect credit obtain homeownership.

Owner Financing

If you can save up a significant down payment towards the purchase of a home, such as 25% or more, then owner financing may be an option for you to consider. With this type of home purchase, the homeowner provides you with the financing to purchase the home. The terms of the financing is ultimately up to the homeowner and in most cases, properties that are for sale via an owner financing option will require a substantial down payment to prove to the homeowner that you are serious about the purchase.

Seller or owner financing typically provides the purchaser with the following advantages that cannot always be afforded by a bank:

  • No bank qualifying
  • interest rates that are typically lower than bank rates
  • down payment flexibility
  • faster closing

FHA Loans

When conventional lenders are unable to extend a mortgage loan to you because of a low credit score, the Federal Housing Administration (FHA) may be able to help. The FHA will assume the risk of the borrower helping those with bad credit to qualify for a home loan even when they have been turned down by conventional mortgage programs. Unlike conventional loans, FHA loans are extended to people with less than perfect credit as long as they can meet certain guidelines pertaining to current financial responsibility, down payment and debt to income ratios.

Lease Options

Many sellers are willing to provide tenants with a rent-to-own or lease option that allows the tenant to live in the home, pay rent and pay additional cash toward the down payment of the home locking in the purchase price for a period of 2-5 years. A lease option is a good way for people with bad credit to secure a home that they would like to purchase and buy some time to clean up their credit rating while also saving money toward the down payment.

Most of the time, the tenant will pay an additional amount of money on top of the regular rental payment each month and the homeowner will place this money into a separate account to be used as the down payment on the home once the tenant is ready, and willing to secure financing. In this method of purchasing a home with bad credit, the actual purchase does not take place until the tenant has saved an adequate amount of money as a down payment and has paid off other debts or taken action to improve their credit score.

While there may not be many lenders jumping on the idea of extending a mortgage to someone with less than perfect credit, there are options available to help those with bad credit to live the American dream. Before you head out to find the home of your dreams, check your credit report and see where you stand!

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