Options for Bad Credit Home Loans
Let's face it even people with a bad credit history need to live somewhere. It is possible to obtain a home loan with a poor credit report, but being informed about your options is very important. This article takes a look at some of the ways someone with bad credit can apply and get approved for a home loan and the stipulations surrounding these different options.
Federal Housing Administration Loans
As with any loan option for persons with less than perfect credit, Federal Housing Administration (FHA) loans are given on a case-by-cases basis. Not everyone who applies for this type of loan is accepted. The way an FHA loan works is that you only need a small amount, usually a 3-5% down payment, for purchasing a home. The down payment can come from another source, such as a relative giving it to you as a gift.
This is also a good option if you are already in an ARM that has risen, making your payments more than you can afford. Some lenders will also offer no prepayment penalties, which can work greatly in your favor, if you ever need to switch to another type of loan for any reason.
Adjustable Rate Mortgage
An Adjustable Rate Mortgage, also referred to as an ARM, helps people with bad credit get a home loan. The way it works is that a lending company will apply a low interest rate in the beginning and give you about two years to build up your credit to a better standing. After a set period of time, your rates will go up, which can be quite steep in some cases. The plan is to be able to build up your credit up enough to lock into a conventional mortgage loan before the adjustable rate increases.
This sounds all well and good, except that you have to really evaluate yourself as a borrower to make this type of loan option work. Will you realistically be able to improve your credit in a two to three year window of time? Another thing to watch out for when applying for an ARM is that the laws governing these types of loans have become stricter in recent years, and they are becoming a bit harder to come by.
