Put your fears about bad credit aside. Just because you have bad credit, filed bankruptcy or gone through a foreclosure does NOT mean you cannot buy a home. You most certainly can buy a home with bad credit. But you're going to pay more than a borrower who has sparkling credit.
The Waiting Period After Foreclosure / Bankruptcy
- The period between bankruptcy filings is seven years, but the ding to your credit report stays for 10 years.
- For better rates with a conforming loan, the wait is four years after filing bankruptcy.
- FHA guidelines are two years after a foreclosure, which means you could qualify for as little as 3.5% down. One year after a qualifying short sale.
- Hard-money lenders will often make loans six months after filing bankruptcy or a foreclosure, but will a require 20 to 35% down payment. The interest rate will be very high and the loan terms are not as favorable; many will contain prepayment penalties and be adjustable.
- Subprime lenders (not to be confused with hard-money lenders) are no longer making 100% financed loans.
How to Improve Your Qualification For a Conforming Loan
- Obtain a major credit card. It's easier to get than you would think after a bankruptcy, for three reasons:
- A bankruptcy filing gives you a "fresh start."
- The lender knows you have no debt.
- You can't file bankruptcy again for another 7 years.
- Show steady employment on the job for one to two years.
- Earn a regular salary or wage (this does not apply to self-employment).
- Save a down payment of at least 10%.
- Avoid late payments and continue to pay your bills on time; do not fall behind.
How FICO Scores Affect Interest Rates
I spoke to Evelyne Jamet at Vitek Mortgage about the differences among FICO scores and how that relates to the interest rate borrowers are charged. The following numbers are in comparison to the interest rate a borrower with a 600 FICO score would pay who did not file bankruptcy or lost a previous home to foreclosure. This scenario assumes the borrower with bad credit is putting down 10% of the purchase price in cash and met the seasoning requirements above.
FICO Score of 600 to 640: + 1.625% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 7.5%.
A $200,000 amortized loan at 7.5% would give you a monthly payment of $1,398.
FICO Score of 560 to 580: +2.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 8.75%.
A $200,000 amortized loan at 8.75% would give you a monthly payment of $1,573.
FICO Score of 540 to 559: +3.425% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.3%.
A $200,000 amortized loan at 9.3% would give you a monthly payment of $1,653.
FICO Score Under 540 to 500: +3.875% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 9.75%.
A $200,000 amortized loan at 9.75% would give you a monthly payment of $1,718.
FICO Score Under 500: +6.25% over prevailing rate. This means if a borrower with good credit is paying 5.875%, your interest rate would be 12%. With a FICO of less than 500, you will not qualify for a 90% loan, but you may qualify for a 65% loan, therefore, you need to increase your down payment from 10% to 35%.
A $200,000 amortized loan at 12% would give you a monthly payment of $2,057.
Comparing Identical FICOs Against Borrowers With No Foreclosure or Bankruptcy
A borrower without a bankruptcy or foreclosure with a 600 FICO would receive an interest rate of 5.875% (based on the above) and pay a monthly payment of $1183 on a $200,000 amortized loan. You can see that filing bankruptcy or having a foreclosure on your record, even with a FICO score of 600, results in an increase in a mortgage payment of $215 over that of a borrower without a bankruptcy or foreclosure. However, that difference in payment will let you buy a home.
Alternative to Bank-Financing
Borrowers who are not satisfied with the rate offered by a conforming lender might want to look at buying a home with seller financing. Land contracts offer a viable alternative. Typically, seller financing offers:
- No qualifying.
- Lower interest rates.
- Flexible terms and down payments.
- Fast closing.
You will want to check with your lender every year or so to find out if you qualify for a refinance at a lower rate.
DISCLOSURE: Vitek Mortgage is a preferred vendor for my employing brokerage and enjoys an affiliated relationship with Lyon Real Estate. Evelyne Jamet handles loans only in New Mexico, Colorado and California and suggests borrowers with bad credit contact a local FHA mortgage broker.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.