Six Steps to Obtaining a Poor Credit Home Loan

By Lorraine Watkins
Mortgage Credit Problems Columnist

Do you have a low credit score but want to take advantage of the mortgage mess to buy a home? If you are like millions of others trying to keep up with credit card bills, car payments and a student loan on a reduced, or non-existent income, you may think that a new loan is out of reach. In truth, loans are more difficult to obtain these days, but you may be surprised that there are still ways to get a home loan with bad credit.

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Why Now?
Now could be your best chance ever to own a home. There is a lot of inventory on the market, about nine months' worth as of June 2009, so there is a wide selection of properties to choose among, especially if you are flexible about where you are willing to live. And homes have depreciated across the board an average of 23 percent since 2005, so there are lots of bargains. Add to that relatively low interest rates, and you have a perfect storm of opportunity-if you can get a loan.

You can't get a loan if you don't apply. But where should you look if your credit is not good? Read on for six steps to get a mortgage loan, even if you have bad credit.

1. Get in the Game
First, consider an FHA backed loan. FHA loans are designed for people with less than stellar credit, and the interest rates are usually less expensive than rates on sub-prime loans, sometimes up to three percentage points less.  Our database includes FHA-Approved lenders; reaching out to them is free and they can give you free advice (and a quote or mortgage pre-qualification if you are looking for one).

2. Look for Help from Experts in Bad Credit Mortgage Loans
While you are online, use one or more comparison shopping sites for bad credit mortgage lenders. Typically, you enter your information just once for access by multiple lenders. Since these lenders are focused on bad credit loans, they know the ins and outs of qualifying with low FICO scores and which lenders will accept which kinds of credit problems.

3. Improve your Odds by Forgoing Jumbo Loans
If you have bad credit, conventional lenders won't touch you with a ten-foot pole unless you have a huge down payment. Then you can get a loan of up to $417,000 and it can be underwritten electronically rather quickly. Otherwise, stay within FHA loan limits for your area. That means a fairly modest home is your best bet if you have a low down payment and some credit issues. Jumbo financing IS out there--but it's very hard to get-- you have to prove you can afford the higher payments, a bad credit lender that specializes in jumbo loans charges much higher rates.

4. Understand New versus Existing Home Prices and Sales
There are two kinds of homes on the market: existing and new. Traditionally, the percentage of sales is about the same for both while the supply of existing homes is larger. That may not be true in some areas. California, for example, is offering a $10,000 tax break to those who buy newly-constructed homes. In distressed markets, deal-seekers may have to decide between negotiating with a struggling developer or a bank entertaining a short sale. The short sale might be a better price but these transactions often take months and fall through. If the developer is still the legal owner of the property, new construction might be a faster way to go.

5. Understand the Appraisal
Appraisals are independent evaluations of the value of the property. If an appraisal comes in lower than your offer, you can still go forward with your purchase--but you are in an excellent position to negotiate a lower price. If you are getting an FHA loan, your purchase contract explicitly states that you cannot be forced to complete a transaction if the home appraises for less than the sales price. If your appraisal comes in higher than the sales price, you still get to buy at the lower price if you have a valid contract and have obtained financing.

6. Understand Interest Rates and Timing
Bad credit mortgage loans are going to cost a few points more than loans for people with solid credit, so interest rates are especially important to those with poor credit. Although interest rates are relatively low right now, they are fluid, which means that they could go up enough to undermine your loan. One good thing about today's soft real estate market is that, rather than asking for a price reduction from the owner, you can ask for them to pay enough points to buy your bad credit loan rate down to something manageable. It shouldn't matter to the seller if they drop the price 5% or pay 5% to get you a good interest rate. They'll still receive the same proceeds.

Remember, you can't win if you don't play, so forget about rejection and start filling out some bad credit mortgage loan applications.



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