Desperately Seeking Money: Bad Credit and New Home Loans

By Gina Pogol
Mortgage Credit Problems Columnist

If you have bad credit and want to buy a new home, you may have to be more flexible than a prime buyer. If you are, and if you have a little time, you too may be able to join the home ownership bandwagon. Here are several sources of funding that you may not have considered.

  1. Home sellers: Sellers who are motivated may be willing to finance your purchase, at least for a limited time, giving you the chance to clean up your credit before refinancing into a grade-A mortgage. Alternatively, many sellers are able to pay points to get your interest rate down to a manageable level, even if lenders add risk-based pricing increases to your mortgage. Be sure to get an appraisal and all inspections even if you are not getting a loan from a mortgage company.
  2. Sub-prime or bad credit mortgage lenders: Yes, sub-prime mortgages are harder to come by than they used to be. Lenders want to see higher credit scores (about 660) and down payments (at least 10%) than they used to, and the loans can be expensive. But it could pay off if you can get a loan on a good property at a low price and refinance fairly quickly into a prime loan. With easy online shopping on this site, it can't hurt to see what's available. Fill out the form above, get some quotes from lenders, and you might be pleasantly surprised.
  3. Hard money lenders: Hard money lenders are different from sub-prime lenders. They are usually private individuals and small lending coops or companies that provide loans to customers who can't qualify even with a sub-prime lender. Hard money lenders don't generally lend without substantial equity, so you need a large down payment. Additionally, they charge very high fees--several points upfront--and rates much higher than the going rate for prime borrowers. This is a good solution only if you can afford a high payment and the huge upfront investment, the property is a fantastic investment and ridiculously under-priced, and you know that you can fix your credit and refinance quickly.
  4. Government loans: FHA, USDA, and other programs feature less restrictive underwriting guidelines. To have a good chance for approval, you need 3.5% down (although family members or community home buyer programs can help with the down payment, and USDA does make zero-down loans), enough in the bank to make a couple of months' payments (this is called reserves), and passable credit. "Passable" means generally that any bankruptcies must have been discharged at least two years ago, foreclosures at least three, you should have cleared any collection accounts, and paid all of your bills on time for at least one year. If you're still working on this, enlist the help of a credit counseling service for budgeting advice and perhaps assistance with paying down excess debts.
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The right home and the right deal could come along, and you should be ready. Fill out the form above to learn what you qualify for, or what you need to do, and then you too could be on your way home.


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