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.