Even with a bankruptcy, bad credit, and no credit it is still possible to get a bad credit mortgage. Of course, the plain reality is that you will not get as good a loan as someone with better credit. The interest rates you get are based on your credit history including your FICO score. With a bad credit mortgage you will pay a higher interest rate and also be required to put down a larger down payment. The cheapest and sometimes easiest route to take is to wait 3 – 4 years, improve your credit score and then apply for a loan. But, if you think you want to try buying a home with a bad credit mortgage, let me give you the basic run down of what to expect.

In some ways, a bankruptcy isn’t the worst thing that could happen to your credit. Since you can only file bankruptcy every 7 years, lenders will know that for at least another 7 years you can’t legally escape your financial obligations. Unfortunately, they do take note of the fact that you may have gotten over extended in the past and they may be reluctant to qualify you for an amount that someone with better credit may get. To get the best rate possible after a bankruptcy, you will have to wait 3 – 4 years. Also, expect to put down a large down payment of about 20% – 30%. The lender wants to ensure that you are financially invested in the house and that you will also incur heavy losses if you default.

In the case of a foreclosure, you may qualify for an FHA loan after as little as two years. FHA loans require a minimum down payment, sometimes as low as 3.5%, so it may be worth it to wait a couple years before realizing your dream of home ownership. Before the housing melt down started, you used to be able to get mortgages for 100% of the homes value from some banks and sub prime lenders, understandably this has proved to be a very risky venture and these loans are no longer available for people needing a bad credit mortgage.

Your FICO score is the main determining factor in the interest rates you will get.

This chart is an example given by FICO as indicative of the impact your FICO score will have on your credit.

If your FICO® score is… Your interest rate is… And your monthly payment will be…
National interest rates, updated daily
760 – 850                      5.07%                   $1,169
700 – 759                      5.29%                   $1,199
680 – 699                      5.47%                   $1,222
660 – 679                      5.68%                   $1,251
640 – 659                      6.11%                   $1,311
620 – 639                      6.66%                   $1,388

For a $216,000 house with a traditional 30 year fixed-rate mortgage you can see how your payments will increase as your FICO score decreases. An interest rate difference of even 1% over the course of a 30 year mortgage will add up to potentially thousands of dollars as you can see in this example. The home buyer with an excellent FICO score of 760-850 will be paying $219 a month less than the buyer with a score in the 620-639 range. You can begin to see how quickly this adds up, in this example the bad credit mortgage will cost $2,628 more per year.

Another possible option for a bad credit mortgage is to rent to own or find a home with seller financing. With a rent to own, you would typically pay a higher rent with a percentage of the rent going towards a down payment. After a set period you may have to qualify for a traditional loan if the seller isn’t financing so you need to be sure that you can meet the terms of the rent to own agreement or you may lose all or part of your down payment. In the case of seller financing, it is exactly what it sounds like, the seller acts as the lending agent. This can be a beneficial arrangement for both the buyer and the seller as there are no middle men such as realtors and banks driving up closing costs. With seller financing, because expenses are kept low, the loan conditions can be quite favorable for a buyer. In both of these examples you are still advised to hire an appraiser and an attorney to review the paperwork to make sure you understand all the conditions outlined in the sales contract.

Without a doubt, the best way best possible to get more favorable loan conditions is to wait it out for about 3 years and work on improving your credit history and your FICO score. But even if you don’t want to wait, it is good to know that you still have some options available to get a bad credit mortgage.

Almost everyone loves the idea of owning their own home or condo; it seems to almost be part of our DNA. When most people consider home ownership they’re thinking almost in a romantic manner driven be emotions rather that practicality. Who doesn’t want to be able to decorate however they want, have back yard BBQs with friends and have a piece of the American Dream. It’s alright and even normal for first time home buyers to get caught up in this “romance” as long as they think through the entire home buying process and realize all the expenses that come with home ownership. These are expenses that most renters don’t even consider and may even be entirely unaware that they exist.

A lot of ads that feature homes for sale list PI (principle and interest) as the monthly mortgage costs but may leave out the TI (taxes and interest). Your total monthly payment will be PITI so be familiar with that term and don’t believe that the payments listed in the paper will be your actual payment. It will depend on your loan, interest rates, and credit; you may not be able to get such a low payment.

In addition to PITI, you will have housing maintenance costs. These are costs that you will have to cover during the term of your home ownership, in most cases they amount to about 1% of your homes value, so if you buy a $225,000 you need to set aside $2,250 a year for expenses. These expenses include long term projects like remodeling the kitchen and baths and putting on a new roof. Short term expenses may be landscaping, a new air conditioner, and plumbing repair. These expenses are an unavoidable part of homeownership that most people are unprepared for. If you try to cut corners and not maintain your house, it can lead to even more problems in the long term – a leaky roof may cause mold or a dated kitchen can make a house unsellable.

If you’re buying a brand new house, appliances may be included in the sale, but sometimes they’re not. If you have to buy a refrigerator, dish washer, microwave, stove, washer and dryer, this is a huge expense. In addition to major appliances you may need to buy window coverings. This may seem like a small expense, but decent widow coverings for a whole house may cost a couple thousand dollars. Of course, you can buy cheap and then upgrade as you go along, but that’s just an added expense down the line.

One of the most fun things to buy is furniture. Most people moving from an apartment already have some furniture but in most cases you’ll need a lot more for a house. This is something you can buy as you go, but in the case of young buyers who have lived with parents or roommates, be prepared for the expense of furnishing a house. Not only sofa, beds, and electronics but all the little things you take for granted like dishes, towels and a vacuum. You’d be amazed how quick these things add up.

You need to pay to get all your utilities turned on – electric, cable, gas, water, and trash. If you have an outstanding bill, guess what, no electricity. Make sure that your accounts are current and that you have no outstanding balances. You’ll also need to have homeowners insurance that covers you for crime and fire. If you need insurance for flood, tornados, and other natural disaster you can expect to pay more.

When it comes to saving money, most people do the obvious such as eat out less, skip the $4 morning coffee, and watch more movies at home rather than pay $12 per person at the theater. These small steps can yield big results in the long run, that $4 cup of coffee just twice a week is a yearly expense of $416 a year. I’m sure most people are already cutting back on these extras so I want to cover some overlooked ways to reduce expenses.

Vehicle Insurance

If you’re like most people, you’ve probably had the same auto insurer for a number of years and just pay the bill on automatic pilot – this is a big mistake. For example, if you bought your car new you probably got full coverage which includes collision coverage so that if your vehicle was totaled in an accident you could replace the vehicle and comprehensive physical damage coverage which pays for damages done to your vehicle due to flooding, theft, or other natural disasters. Well, fast forward 3 years and that same coverage might not be necessary, as your cars value has decreased.

It is even a good idea to shop around for general liability insurance at least once a year. Call your current agent and discuss the fact that you are shopping around for lower rates and see what suggestions to your policy they suggest and then call other agencies to do some comparison shopping.

Health Insurance

Between health insurance, home insurance and vehicle insurance probably the most expensive is health insurance if you’re over the age of 40. Since rates and coverage varies wildly you need to shop around at least once a year. With the upcoming Senate hearing and a possible government takeover of health care, look for health insurers to become even more competitive, a savvy shopper could potentially save hundreds of dollars a year.

Pay Cash for Everything – The Las Vegas Effect

For some reason there seems to be a psychological difference between paying cash and using a credit card. Even a debt card gives the illusion that the money isn’t real. You’re one step removed from the feeling of real cash coming out of your pocket. If you think this isn’t real, consider the fact that casinos exchange your money for “fake” money or casino chips. Why do you think they do this? It’s because removing people away from the idea that they are losing real money promotes more gambling which equals more money for the casinos bottom line.

So, after you have decided how much money you can afford to spend on nonessential like eating out, movies, clothes, and entertainment put that amount of money into your wallet, divide the money into weeks or for the entire month, whatever works best for you. I promise that if you pay cash for everything, absolutely no credit or debit, you’ll find yourself rethinking a lot of your purchases.

Start the Preapproval Process Early

As soon as you know you are in the market for a home loan, start shopping around. It’s best to talk to two or three lenders to see what rates and offers they have available. Although loan offers won’t vary wildly between lenders, you will obtain the absolutely best rates by doing a loan comparison.

Get Your Credit Score in Order

Get all three of your free credit reports from Experian, Equifax and TransUnion. Make sure that everything is in order on your credit reports and that you have the credit score you were expecting. Obviously, if you have some bad things reported on your credit history that are not yours, you need to report it and begin the process of having it removed. If you have negative things on your credit report that are actually your responsibility then you need to start taking steps right now to improve your credit score.

Begin Compiling Your Financial History

Each lender has different requirements, but due to the recent problems in the housing and financial sectors, lenders have become much stricter with their lending procedures. You’ll usually need to have two to three years of W-2s and tax returns, plus you’ll need to provide paycheck stubs and proof of employment. In addition, most lenders will need bank statements and information about any additional investment you may have such as stocks or other real estate holdings.

Know that Preapproval Loans Expire

You should be aware of the fact that preapproved loans are only good for a set time frame, usually 90 days. In some cases, you can get this time period extended if you aren’t having any luck finding a home you like. The reason that these preapproval loans expire is so the bank can protect its interests, the lender needs to be sure that you haven’t recently lost your job, become involved in a lawsuit or any other situation that could adversely impact your finances.

This is part of an overall plan to help revitalize older, potentially higher

crime neighborhoods by moving in local police officers and having them maintain a primary residence in the neighborhood. To help encourage this revitalization, the FHA makes special loans available to full time police officers who work for a city, county, state or Federal law enforcement agency.

If officers agree to live in the home as their primary residence for 3 years they are eligible for a 50% discount of the home price as well as a down payment of only $100, but in order to receive the $100 down payment option, the house must be purchased with an FHA guaranteed loan.

Teacher Next Door Program

 This is essentially the same as the officer next door program, it is also to encourage the revitalization of neighborhoods which are currently deteriorating but with a little help might recover economically. This program is available to full time teachers or administrators working in K – 12 education, teachers who work in both private and public schools are eligible.

For the guarantee that the teacher will occupy the house as a primary residence for 3 years, the teacher is eligible for a 50% discount off the house’s price and a $100 down payment option if they get an FHA loan.

Housing Action Resource Trust (HART) (this program to be discontinued 10/31/09)

HART is a California non profit company whose function is to help certain communities and provide eligible home owners with financial assistance. For people that qualify, HART will give them up to $15,000 for a down payment and closing costs. The buyer must put down 1% of the down payment out of his own money. This money is “gifted” and doesn’t need to be repaid. As part of the agreement, the buyer must attend some credit counseling or home ownership responsibility classes. The HART money can be used to purchase a single family home or a multi unit property with up to 4 units.

CHDAP (California Housing Down Payment Assistance) – only available in CA

This program helps people buy houses with no money down by using both an FHA loan and a CHDAP second mortgage of 3%. This CHDAP financing is not free money, it must be paid when the primary mortgage is paid off, refinanced, or the home is sold.  With CHDAP and seller’s assistance combined, a homeowner can purchase a home with no money down or closing costs.

In order to qualify for this program your income must be below the average income for the area you are purchasing a home, you must be able to qualify for an FHA loan, and you can not have owned a house in the last 3 years. In addition, the house you are purchasing must not exceed FHA loan limits for your area.

Neighborhood Gold Program

This program is administered as a 501 (c) (3) non profit and allows all FHA qualified home buyers to purchase a home with no money down. Depending on the seller’s level of participation, the buyer could receive 3% – 10% to help with the down payment and closing costs. It does cost 1% of the loan amount (not to exceed $1,000) to be able to enroll in this FHA program but this fee can be paid by the seller or subtracted from the cash grant.

A nice added bonus of this plan is that you get one year in the Involuntary Unemployment Mortgage Program which will pay your mortgage up to $1500 a month for 1 year if you lose your job through no fault of your own such as with a strike, bankruptcy or layoffs.

Public Housing Loans

Sometimes, HUD may sell all or a portion of its housing inventory and makes those units available to low income families. To qualify for this program you must meet income requirements, not have owned a home in 3 years, have a job, and attend some finance counseling classes. This program offers financing for home ownership, home repairs, and utilities. 

Indian Home Loan Guarantee Program

To receive mortgage help with the program you must be a member of a federally recognized Indian tribe or of Native Alaskan descent If you qualify for this program which is called Section 184, you may be eligible to get a loan with only 2.25% down for houses priced over $50,000 or a loan with only 1.25% for loans under $50,000. This financing can be used for homes both on and off of Indian reservations and the money can be used for buying, building, or fixing an existing home.