Buying a Home With Bad Credit

Discover that buying a home with bad credit is possible. Find the best bad credit home loans and how an FHA home loan can help you with your mortgage.

Have you experienced bankruptcy or gone though a foreclosure? Then it's likely you have bad credit, unless of course it's been over 10 years, the time it takes for the credit bureaus to drop this off your report.

I'm glad you ask, because you are not alone. I want to help you since we all know that we still need a roof over our heads.

Best Choice After a 24 Month Waiting Period

Ideally, we'll rent for 2 years after we have gone through foreclosure. Renting can offer you a chance to regain your credit standing. Having 24 months of rental history with the same landlord, you now have a small history that a lender can use to qualify you for a mortgage.

After 24 months you may be able to obtain an FHA home loan with as little as 3.5% down. Also the FHA mortgage offers you the opportunity to use down payment assistance, grants or even sellers concessions. The total sellers concessions to be used is up to 6% of the purchase price.

FHA interest rates are normally a little higher than the conforming loans, but since we're buying a home with bad credit we expect to pay slightly more anyway. After all the lender is taking somewhat of a risk on us. The US Government is going to guarantee the loan to the lender so the risk is smaller than normal.

Hard Money Lenders, Not a Good Choice

If it's been about 6 months after your foreclosure, you may be able to use one of these.

You will pay a lot higher interest rate with these guys! You might as well look at them as loan sharks because basically that's what they are. They know you're in a tough spot buying a home with bad credit and will take advantage of it.

I've seen people who will lend money on homes at rates of 15% and more. Furthermore, they want you to put a large down payment on the home, perhaps as much as 20%-35%. The terms will not be that good, you'll find pre-payment penalties and it will likely be an adjustable rate loan.

Avoid this option if at all possible. They are the worst bad credit home loans choice.

The Subprime Option

Before the mortgage crisis, you could find subprime lenders offering 100% financing for those buying a home with bad credit. Now most of them have gone out of business.

Of course the interest rate is higher with subprime loans, but not as bad as the hard money lenders. They do not offer 100% financing so you will still need a good sized down payment. Likely it will be 10%-30%.

Once again, although this is an option, it's not that good of one if you're still trying to get on your feet.

These are the type of loans that failed first and helped us get into the mess we see today as of this writing in the fall of 2009.

Conforming Loans

The lowest interest rate available will be the conforming loan. This mortgage is for those with clean and unblemished credit, no bankruptcy or foreclosures on their report.

So this is what you really want to aim for, so how can we do that?

Well, it will be a slow process but you can do this.

I know one person who was able to buy a new condo within 18 months after filing bankruptcy. It was not a conforming loan that he got but it was an Alt A loan which is just one step below. The interest was decent, about .75% above the conforming rate.

Improving Your Credit Score the Fastest Way Possible

Go out and get yourself a new credit card after filing your bankruptcy. Don't worry, it's not as hard as you may think. Lenders know you cannot file again for a bankruptcy for another 7 years so they will take a chance. Also, you no longer have any debt so it should be fairly easy to get some unsecured credit started.

If for some reason they hesitate, get a secured credit card first, then after using it for a few month go back and apply again.

Now start saving up for your down payment. I would try and save at least 10% just in case your score rises above 680. Keep all your payments on time, stay on your job and keep your focus.

Within a short period of time you'll be buying a home with bad credit even though it has not been 10 years since your problems began.

Your credit score affects the interest rate you'll pay in a big way. Even though you may find sub-prime lenders that finance homes with a 580 score, you will still find it hard with the high interest rate and unfavorable loan terms.

SUMMARY

With the understanding of how our credit score affects our interest rate, we can begin making our plans for the future. Personally I think the FHA home loan option is the best way to go.

It will require discipline no matter how we look at it. You'll recover, don't worry. Just create your plan and work it!

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