How to Buy a Home When Your Credit Report is Negative

Obviously, you won’t be able to walk into your local mortgage company office and get a loan unless your credit score is exceptional and your verifiable income shows that you can comfortably make the payments.

Gone are the days of “sub-prime” mortgages, and gone are the days of “stated income” for borrowers with high credit scores. Gone are the offers of “zero down” loans and creative financing options that allowed sellers to carry back a note for part of your down payment.

Lenders are being darned careful right now.

So what can you do if you want to begin building equity in a home – but your credit score is marginal and available funds for a down payment are scarce?

You can look for lease to own properties, and seller-financed homes.

Borrowers aren’t the only ones affected by this crisis – homeowners who need to sell are also in a bind, because the pool of buyers who will qualify for loans is getting smaller and smaller as lenders tighten their requirements.

Thus, those who can will begin entertaining the idea of seller financing and lease to own arrangements.

This could be good news for prospective homeowners, but it could also mean that home ownership will cost more. Traditionally, seller financing comes with a higher interest rate than those we’ve seen in the past few years. That means you’ll get less house for the same payment. Also, wary sellers might want a larger down payment than you are able to make.

These sellers will also want to see your credit report, but will likely be a little more flexible than mortgage lenders.

That leaves “rent to own” or “lease-purchase” arrangements. Under these situations, you won’t be on title, so won’t get the tax benefits of home ownership until the purchase is completed. Still, you’ll be locked into a purchase price, and if inflation continues, that could be a good thing.

Also, these sellers won’t be as fussy about your credit score, because they know that if you default, they’ll get the house back immediately rather than having to go through the long and expensive process of foreclosure.

But do be careful. Many “rent to own” properties are owned by companies seeking to take advantage of the current crisis, and their contracts are strict. For instance, they may require you to get a loan and cash them out within a set time frame. If you can’t do it, you’re out of the house and all payments made toward the down payment are kept as “liquidated damages.”

Making regular on-time payments to these companies will help raise your credit score, and the extra you pay will force you to build a down payment, so a lease purchase could be to your benefit.

Just be sure to read the fine print – all of the fine print.

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Disclaimer: This information has been compiled and provided by as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.