How To Get A Home With Bad Credit

How to Get a Home Loan with Bad Credit after Foreclosure or Bankruptcy:

Just because you have bad credit, filed for bankruptcy, or have gone through a foreclosure does not mean you cannot buy a home. You can buy a home with bad credit, but you're going to pay more than a borrower who has good to excellent credit.

The Waiting Period After a Foreclosure/Bankruptcy:

Ø  The period between bankruptcy filings is seven years, but the ding to your credit report stays for 10 years.

Ø  For better rates with a conforming loan, the wait is four years after filing bankruptcy.

Ø  FHA guidelines are two years after a foreclosure.

Ø  Hard-money lenders will often make loans six months after filing bankruptcy or a foreclosure, but will a require 20 to 35% down payment. The interest rate will be very high and the loan terms are not as favorable; many will contain prepayment penalties and be adjustable.

Ø  Subprime lenders (not to be confused with hard-money lenders) are no longer making 100% financed loans.

How to Improve Your Qualification for a Conforming Loan:

Ø  Obtain a major credit card. It's easier to get than you would think after a bankruptcy, for three reasons:

1.       A bankruptcy filing gives you a "fresh start."

2.       The lender knows you have no debt.

3.       You can't file bankruptcy again for another 7 years.

Ø  Show steady employment on the job for one to two years.

Ø  Earn a regular salary or wage (this does not apply to self-employment).

Ø  Save money for a down payment of no less than 10% of the purchase price.

Ø  Avoid late payments and continue to pay your bills on time; do not fall behind.

How FICO Scores Affect Interest Rates:

For the examples below, the following numbers are in comparison to the interest rate a borrower with a 600 FICO score would pay who did not file bankruptcy or lost a previous home to foreclosure. This scenario assumes the borrower with bad credit is putting down 10% of the purchase price in cash and met the seasoning requirements above.

Ø  FICO Score of 600 to 640: + 1.625% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 7.5%.

A $200,000 amortized loan at 7.5% would give you a monthly payment of $1,398.

Ø  FICO Score of 560 to 580: +2.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 8.75%.

A $200,000 amortized loan at 8.75% would give you a monthly payment of $1,573.

Ø  FICO Score of 540 to 559: +3.425% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.3%.

A $200,000 amortized loan at 9.3% would give you a monthly payment of $1,653.

Ø  FICO Score Under 540 to 500: +3.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.75%.

A $200,000 amortized loan at 9.75% would give you a monthly payment of $1,718.

Ø  FICO Score Under 500: +6.25% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 12%. With a FICO of less than 500, you will not qualify for a 90% loan, but you may qualify for a 65% loan, therefore, you need to increase your down payment from 10% to 35%.

A $200,000 amortized loan at 12% would give you a monthly payment of $2,057.

Comparing Identical FICOs Against Borrowers With No Foreclosure or Bankruptcy:

A borrower without a bankruptcy or foreclosure with a 600 FICO would receive an interest rate of 5.875% and pay a monthly payment of $1,183 on a $200,000 amortized loan. You can see that filing bankruptcy or having a foreclosure on your record, even with a FICO score of 600, results in an increase in a mortgage payment of $215 over that of a borrower without a bankruptcy or foreclosure. However, that difference in payment will allow you to purchase a home.

Alternative to Traditional Bank-Financing:

Many borrowers who are not satisfied with the rates that are offered by a conforming lender will look at buying a home with seller financing. Rent to Own/Lease Purchase deals also offer a viable alternative. Typically, seller financing offers:

Ø  No qualifying.

Ø  Lower interest rates.

Ø  Flexible terms and down payments.

Ø  Fast closing.

It is also a good idea to check with your lender every year to find out if you can qualify for a refinancing at a lower rate.