How to Buy a Home With Bad Credit

By Larry Parr

  • Overview

    Buying a home using traditional bank financing is almost impossible if you have bad credit, especially in slow economic times. The answer for those people whose credit has been compromised is to seek out less-than-conventional financing. You will need a FICO score of at least 650 to qualify for most bank mortgages; the higher your score the lower your interest rate. For most lenders a score below 650 will only qualify you for a sub-prime loan at an extremely high interest rate, if such loans are even available at all. Owner financing may be your best bet if you have poor credit. With owner financing your credit score may or may not be an issue. If you can convince the seller that you are a good risk, you can take possession of a house no matter what your credit standing is.
    • Step 1

      Save as much cash as you can. The more of your own money you can put into a property the easier it is going to be for you to get an owner to carry the remainder of the paper.
    • Step 2

      Review your credit reports from the three major credit agencies just in case your credit isn't as bad as you think. A FICO score of less than 650 indicates that you will have considerable trouble getting a traditional 15- or 30-year home mortgage.

    • Step 3

      Look for homes for sale where the seller will carry financing. These usually say something like "Owner financing" or "Owner will carry." Negotiate the best deal possible with the seller. You may have to pay the full asking price for the home, but it may be possible to negotiate a good interest rate. Remember, in deals like this, everything is negotiable. As long as you feel confident that you can meet the monthly mortgage payment and pay for insurance, then the deal you have worked out is probably worth it to you. Remember, you will be saving money by not paying "points" on your loan. Closing costs may be less as well. An owner may not want to carry a loan for more than five to seven years.
    • Step 4

      Use the cash you have as an incentive if the owner seems hesitant about financing the deal. If the seller never intended to finance the deal, then putting up a large down payment in cash--say, 20 percent of the asking price or more--may convince the seller that you are a good enough credit risk to allow you to buy the house even though your credit score may not be good. Even if the seller indicated up-front that he or she was willing to self-finance the purchase, a down payment of 20 percent or more in cash could sweeten the deal and perhaps allow you to negotiate a lower interest rate.
    • Step 5

      Sweeten the deal even more (if necessary) by offering to place a quit claim deed into an escrow account with escrow instructions that require the escrow officer to file the quit claim deed (turning the house back over to the original owner) if you are more than 15 days late with a payment. This is a "sweetener" that you should only use if necessary and only use if you are certain you will be able to meet all payments on time. Otherwise you could lose your down payment and all payments you made prior to your late payment.
    • Skill: Moderate
    • Tip: Negotiate. When you enter into an owner-financing arrangement almost every aspect of the deal is up for negotiation.
    • Tip: Do not fall in love with a house before you make a deal you can live with.
    • Tip: Contact the three credit reporting agencies directly rather than going through a middleman. You are allowed to get one free copy of each of your three credit reports each year.
    • Warning:
    • Have a real estate lawyer look over the final paperwork before you sign it.
    • Use an escrow company to transfer title.

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