If you're buying a home in today's soft market, you should be able to get help with your bad credit mortgage from home sellers. Sellers expect buyers to offer less then the asking price--that's normal. If the seller is asking $200,000, an offer of $188,000 to $194,000 would probably not be out of line. However, if you have bad credit, you're better off offering full price and asking the seller to pay your closing costs.

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Closing costs are higher when you have bad credit

If you have a credit score of 620, conventional mortgage lenders add three points--that's three percent of your loan amount--to your normal loan fees. You can pay these fees out of pocket, you can have the lender pay them for you (but you'll have to accept a mortgage rate about .5 percent higher), or you can ask the seller to pay. Fannie Mae and Freddie Mac allow sellers to pay your closing costs--up to 3 percent of the sales price, but you'll have to come up with 20 percent down because mortgage insurers won't accept home loans for people with bad credit. Here's how asking the seller to pay your costs would affect your mortgage payment:

Traditional offer:

Asking price: $200,000
Offer: $194,000
Loan amount: $155,200
Cash to close: $46,560
Payment at 5.25%: $857.02

Bad credit offer:

Asking price: $200,000
Offer: $200,000 with seller paying 3% closing costs
Loan amount: $160,000
Cash to close:$43,200
Payment at 4.75%: $834.64

The bad credit offer means you pay $3,360 less at closing and about $23 less each month.

What about an FHA mortgage?

If the new home loan amount is within Federal Housing Authority (FHA) mortgage limits, the FHA loan is a better way to go. FHA allows sellers to pay up to 6 percent of the sales price of the home towards the buyer's closing costs. You can use this money to buy down your mortgage rate and to covers costs like property taxes, escrow fees, and title insurance (typically about 2 percent of the sales price). If the seller covers your closing costs, you may be able to increase your chances of mortgage approval with bad credit by putting 5 to 10 percent down instead of the minimum 3.5 percent.

FHA mortgage with minimum down payment:

Asking price: $200,000
Loan amount (including 1% MIP): $194,930
Cash to close: $7,000
Payment at 4.625%: $974.65
Monthly mortgage insurance: $186.81

FHA mortgage with 10% down (required for bad credit scores 500 - 580)

Asking price: $200,000
Loan amount: $181,800
Cash to close: $20,000
Payment at 4.625%: $934.71
Mortgage insurance: $174.22

If you have bad credit, loans are more expensive. But that doesn't mean you have to shoulder the entire expense yourself.