REO Bad Credit Home Mortgage?

By Gina Pogol
Mortgage Credit Problems Columnist

Jim Asks: Dear Gina, I wouldn't say I have bad credit, but I have had some credit problems--my score is definitely not over the 700 that everyone says you need. I want to buy a bank-owned house and fix it up. Will the bank that owns the home give me a mortgage if my credit isn't terrific?

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Gina Says:

Hi Jim,

You have a couple of issues here. First, do lenders with foreclosures on their books lend to people who buy those homes? And, second, would this increase your chances of getting a mortgage? I'll address both of those issues.

Some lenders do finance buyers of their bank owned aka real estate owned (REO) properties. This can be advantageous for a couple of reasons. First, their underwriting criteria may be relaxed a bit, and their down payment requirement may be lowered. Second, they are unlikely to require the repairs that another lender might. One major catch-22 with financing REO homes is that the lender that owns the home does not want to spend its money to make repairs, while the lender financing it is very likely to require repairs before it funds the loan. Oops. If this is a concern for you, I suggest that you work with a real estate firm that is extremely experienced with these kinds of transactions, with an agent who can tell you exactly which lenders are willing to finance their own REO deals and how tough they are about approving such loans. That way you don't waste time involving yourself in deals that you can't close.

Second, if you have a specific property in mind, and the lender won't fund your REO purchase, consider FHA financing. You can't have truly bad credit, but you won't need a 700 score to qualify either. And FHA can finance needed improvements with your home purchase. This is called a 203(k) mortgage. Again, some lenders are willing to sell REO to borrowers with FHA financing, others are not. Another way to solve the repair dilemma is to ask the bank that owns the REO if it will allow you to enter the property and make the necessary repairs to satisfy the new lender. Or, some lenders escrow the amount the appraiser estimates will be required to repair the house. This amount is held in escrow until the buyer completes the repair work after he or she has closed on the home. Your REO-savvy real estate agent should be able to guide you accordingly.



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