How can bad credit affect home buying in Houston?
A lot of home buyers in Houston TX struggle with credit and can’t qualify for a mortgage. The biggest culprit is their poor credit score. Bad credit can affect your home buying experience in many different ways.
Here at Shop Owner Finance, we specialize in working with credit-challenged home buyers. We know firsthand that while the process of buying a home in Houston TX or anywhere else for that matter is anyway complex, it becomes even more challenging for credit-challenged individuals and families.
Most people who are struggling with credit believe that their chances of buying a home are almost negligible. There is no denying the fact that you may face some challenges that buyers with a good credit score don’t, but you don’t need to give up your homeownership dream just because your credit is not optimal.
In recent articles, we discussed the reasons for bad credit and credit score required for buying a home. Check them out to learn more about what may have caused your credit score to drop and what steps you need to take to fix it.
In this article, we will discuss how your home buying strategy will be different if you have bad credit and what steps you need to take:
Explore alternative financing options
First of all, you need to explore alternative financing options. Your mortgage application is being denied by traditional lenders, but it doesn’t mean that you don’t have any other options. You can buy a home listed as rent-to-own. However there are certain pros and cons you must be aware of when it comes to buying a rent-to-own. We discussed these in this article.
Owner financing is yet another option that you should definitely explore. In fact, we have helped hundreds of credit-challenged people buy with owner financing in Houston and other Texas cities. In a recent article, we discussed about some risks associated with owner financing.
Determine your budget
Knowing your budget is anyway necessary, but it becomes even more important if you have bad credit.
We recommend that the amount of down payment you can arrange should be the main factor to take into consideration while determining your home buying budget.
The reason is that if you are willing to put more than 15-20 percent down, traditional lenders may consider your mortgage application even when your credit score is not optimal. You won’t get the best terms, but you can still buy a home with a conventional mortgage.
However there is a catch - if your down payment is less than 20 percent, you will pay for private mortgage insurance (PMI) which could be up to 1 percent of the total loan balance annually. So your loan balance is $150,000, you will make PMI payment of up to $1500 per year. It is in addition to your monthly payments including principal and interest.
For a home priced $150,000, you will need just $30,000 to avoid paying PMI. And if you don’t, be prepared to pay $1500 extra every year during the entire life of the loan. You will pay a PMI amount of $45,000 over 30 years (when you don’t calculate the return that you get if you invest this amount of money in stocks, bonds, fixed deposit or anywhere else).
For owner financing also, we recommend a large down payment because it will reduce the risk for the seller and as a result, he or she will feel more confident about owner financing the property to you. Most people selling with owner financing in Houston tend to ignore your credit score if you are willing put 15 percent or more down.
Rebuild your credit
In extreme cases, you may have to wait till your credit score improves. Depending on the factors causing bad credit, this may take anywhere from a few months to several years. For example you can fix your credit in a few months if missed credit card payments caused your score to drop. But a foreclosure, short sale or bankruptcy will affect your credit score for at least 7-8 years.
If you are a foreign national, self-employed or a victim of identity theft, you’ll need to follow different strategies to build credit. A lot of people have never obtained a loan, so they don’t have any credit history. It’s necessary for them to first build a credit history so that mortgage lenders could determine their credit score.
If you have a large down payment but can’t qualify for a traditional loan in Houston, you should consider owner financing.
You will pay a slightly higher interest rate, but owner financing will help you build credit. Your payments will be reported to credit bureaus. You can refinance with a traditional lender once your credit improves.
The important thing to keep in mind is that bad credit is not the end of the world. You can still buy any home you want in Houston. Set an appointment today to learn how our specialized real estate brokerage service can help you buy a home with no credit check or income verification.