It's no surprise with the current state of housing with regard to homeowners upside-down on their mortgage that one's credit score can take a hit. Many homeowners, or former homeowners, were left no choice but to short sell or drop into foreclosure when unsuccessful short selling. Some homeowners did short sales just because it made financial sense, also called strategic short sales.
For whatever reason you do it, a short sale or a foreclosure will cause a big drop to your credit score. After that, a traditional commercial lender will not even consider the borrower for a mortgage backed loan for another purchase.
However, many people in this situation may still be in good condition to purchase property. The way to do this is with a "private money lender," sometimes also referred to as hard money lender.
In order for a private money lender to consider lending money you must:
- Have a substantial downpayment, at least 20% but more likely 40% or more
- Have a good, reliable, demonstrable income
- Submit a mortgage application just like applying for a tratditional commercial mortgage-backed loan
You must also be prepared to pay more. How much more? That depends on a lot of factors. Think about 2 - 5 points loan origination fee and 2 - 5 points above well qualified borrower traditional loan rates. Additionally, all other usual and customary closing costs will be apply.
If your credit is not good this is an alternative. You should remember that the terms are set up to enable the borrower and provide a short term solution while credit repair is under way. The terms of the loan are usually something like a 30 year amortization with interest only payments (this keeps the payments afforable) with a balloon payment due in 2 - 5 years.
Since neither the borrow or the lender want a long term arrangement it works out for both parties. At the end of the term the borrower will be well qualified for a traditional loan at better rates and then repays the note (the balloon) to the private money lender.
This is an option available to the right borrowers under the right terms and conditions.
These are very much the same conditions that prevail with seller financing except it's a third party providing the loan versus the seller.
You mortgage broker or Realtor can help steer you in the right direction to find a lender.
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