Bad Credit But Good Down Payment - Can I Get a Loan?

Reader Question: What if you have bad credit but have stayed out of debt for over a year, have a good job, and a substantial down payment. Is it possible to get financed for a home?

Let me start with my usual "disclaimer" to this type of question. The only way to find out for sure whether or not you can get qualified for a mortgage is to apply for one. You can do that through the LendingTree links on our mortgage quotes page.

With that out of the way, let me offer my thoughts on the subject. Congratulations are also in order. It sounds like you have got your finances well under control now. Kudos for that. However, if your credit score is still low, you have a major obstacle to mortgage qualification. Basically, you're doing well with two out of three factors a lender will look at:

• Credit score -- It sounds like you need some work in this area.
• Debt-to-income ratio -- If you have a good job and you are debt free (as you've said), then your DTI ratio should be in good shape.
• Income -- You said you have a good job, so I can assume that you're doing well in this department too.

Obviously, these are not the only things a lender will review when considering you for a loan. But they are some of biggest factors that will determine their final decision.

Having a substantial down payment also works in your favor. In fact, most lenders today are requiring 20% down. It seems the days of low-down-payment mortgage loans are gone, at least for now. So having a good chunk of change to put down is a big plus for you.

The question is, do your plus factors outweigh the minus factor of having a bad credit score? I can't answer this -- only a lender can. But I can tell you that it's really hard to get a home loan with a bad credit score in this economy. Of course, it depends on just how bad the score is.

Let me end on a positive note. It doesn't take that long to repair your credit situation. It sounds like you're well on the path already, by keeping your debt low and managing your finances. Keep that up, and you'll improve your score before you know it.

In my previous blog post, I posted a video about raising a credit score. You might want to give that a look as well. It's only about three minutes long, and it explains that three most important things to do when trying to boost a score.

Hope that helps. Good luck!

The Weekly Bad Credit Home Loan Question

Reader Question: Our credit sucks. Is there any way we can get a loan for a house?

Somebody asked a similar question a few days ago. Actually, their situation was worse. They wanted to buy a home with bad credit and no money down ... which is virtually impossible in this market / economy.

This is actually a very common question. Once a week, somebody will write in asking about ways to buy a house with a bad credit score. I wish I had some good news to offer in such cases, but I don't. It is extremely difficult to get a mortgage loan with bad credit these days.

Here's what you must realize. Our financial institutions are failing right now. People are using the word "crisis" to describe our current economy. And much of this mess can be traced back to the subprime loans of the 1990s and early 2000s. Many mortgage lenders are buried under non-performing loans (from borrowers who defaulted on their mortgages).

Depending on what you mean by a "bad" score, it will be very hard to find a willing lender in this market. In fact, many home buyers with decent credit scores are having trouble qualifying for mortgages these days. I just helped the folks from NBC Nightly News find people like this for a story they are running this week.

Wish I had better news for you, but I just don't. Buying a house with bad credit is hardly an option right now.

Bad Credit and No Money Down - Don't Buy

Reader Question: With bad credit and no money down who should I contact first?

I'm not sure what you mean by "who should I contact first." But if you are asking how to move forward with getting a mortgage loan and buying a home, my advice is not to do it. That's probably not what you want to hear, but it could be the best advice you get all week.

If I were you, I would focus on doing two things simultaneously -- improving my credit score and saving money toward a down payment. Let's talk about each one in turn:

Improving Your Credit Score

If you've been watching the news lately, you'll know that our economy is in serious trouble right now ... in worse condition than it's been in for decades. Much of this is the direct or indirect result of the subprime mortgage collapse that in turn wreaked havoc on our housing market.

The federal government has (finally) stepped up its regulation of lending institutions in this country. Too little too late, in my opinion, but that's another article entirely. So mortgage lenders today require borrowers to have better credit scores in order to (A) qualify for a loan and (B) get a decent interest rate on the loan. In other words, subprime loans to borrowers with bad credit are practically extinct these days.

If you truly have a "bad" score by a lender's definition, you will have trouble qualifying for a mortgage loan. If you do qualify, I can practically guarantee that you'll be paying a ton of interest on the loan. This could lead to default and possibly foreclosure problems down the road, which is happening to thousands of Americans as we speak.

Saving Up for a Down Payment

This is secondary to the credit score issues covered above, but it's still an important point. If you can put money aside for a down payment of 20 percent, your monthly mortgage payment will be much smaller. You'll also have an easier time qualifying for a loan, because you won't have to borrow as much for the principal amount -- you'll be paying some of the home price up front, in the form of a down payment on the home.

Don't be discouraged by all of this. Just be patient. It's probably not the advice you wanted, but it's the advice you need. Bad advice dished out by greedy mortgage lenders is partly what led us to the economical mess we are in now!

Work on boosting your credit score and start saving money. If you can reduce your debt as well (starting with those high-interest credit card balances), that will also help your cause.

Good luck!

Buying a Home With Very Bad Credit - A Bad Idea

Question from a reader: "Can you buy a house with a very bad credit score, and if so how would you go about it?"

Let me start with the short answer:
Yes, buying a home with very bad credit is possible. If you pay for the house out of pocket (without a mortgage loan, then nobody will care what your credit score is.

Now for the long answer:
But let's assume that you cannot buy a house with cash down. If, like most people, you need a mortgage loan to cover the cost of the home, then your credit score will most certainly come into the picture. In fact, it's one of the first things a lender will look at when you apply for the loan.

So now we have a different question:
Can I get a mortgage loan with a very bad credit score? While it may be possible to buy a house under these circumstances, it's also (A) highly unlikely and (B) a bad idea. When a lender reviews your finances and finds that very bad credit score, that will likely be the end of the road.

Lenders refer to this as a subprime borrower. This probably rings a bell, because subprime loans have been in the news a lot lately -- and for bad reasons. Subprime mortgages are those given to people with low credit scores. The interest rate on such a loan is typically much higher than the rate a person with good credit might pay.

But here's the thing ... even subprime loans are becoming extinct. The federal government has imposed tougher lending restrictions on the mortgage industry (as a result of the so-called subprime crisis). So the days of "easy lending" to people with very bad credit scores are a thing of the past. This could all change at some point in the future, but it's the state of the housing market today.

So what does this mean to you, as a potential home buyer? It means several things. While you might have had options in the past for buying a house with very bad credit (namely, through a subprime loan program), most of those options are gone today. It also means you need to work on improving your credit if you someday want to qualify for a mortgage loan -- and get a decent interest rate in the process.

This probably isn't the answer you wanted to hear, but it's the answer you need to hear. If you attempt to buy a house with very bad credit you'll likely end up at a dead end. In the event that you do get qualified for a loan, the lender will tack on a ridiculously high interest rate. This means a bigger mortgage payment each month, and a greater chance that you'll have trouble making those payments.

This kind of scenario happens all the time in this country. It's a common pattern. A person attempts to buy a house with very poor credit and ends up paying extremely high interest on the loan. The next thing they know, they are no longer able to make their payments. So the lender forecloses on them. This is happening in record numbers right now, all across the United States.

So for anyone who is considering buying a home (and applying for a mortgage loan) with a bad credit score, my advice is this. Don't do it! Fix your credit score first. Start reducing your debt. Start saving money. Pay all of your bills on time. Do these things, and your credit will improve. And when that happens, you'll have a much easier time getting a loan ... and getting into a new home!

Bad Credit Home Loans - Becoming Extinct?

The subprime roller coaster continues, with more and more cities citing record-high foreclosure numbers. One might think that the bad credit home loans that caused these problems would become extinct. In fact, it's true that many of the subprime / bad credit lenders who were peddling these loans have gone out of business (or soon will).

But is the bad credit home loan becoming extinct? No. It's just lying low for a while. You see, selling mortgage loans to people with low credit scores is profitable (for the lenders anyway). Sure, it can put a hurting on the unsuspecting home buyer who did not read between the lines when signing the paperwork ... but that's just the price of doing business. Right?

Am I being cynical? I'm being a little cynical. In truth, I am against bad credit home loans that grant home ownership to people who cannot afford it. These types of loans just cause problems for everyone. And when they are sold in huge volumes (as in the 1990's), they create far-reaching economic problems (like the recession of current times).

"It's a bit of a rough patch," says the president. Sorry, George, but you are wrong. It's a recession. Wake up and listen to your economic advisers already. It's a recession, and the bad credit home loans made by your cronies helped to create it. (See subprime love story for more on the crony connection.)

What am I getting at? Sorry, I lost track for a minute there. What I mean to say is that there's a new article on the main website that explains the bad credit home loan in all its gory detail:

Bad Credit Home Loans - Usually a Bad Idea

Hope you like it. Have a great weekend. I'll blog with you again soon.

-Brandon

Poor Credit Home Loans - Beware

I just finished my weekly Internet research to see which credit and home buying topics are the most popular (judging by the number of Internet searches for those phrases).

The phrase poor credit home loans is still high up on the list. This means that a lot of home buyers -- presumably with bad credit -- are wondering what their home loan options are.

Here's where I offer a word of caution. Getting a home loan with poor credit means that you will likely be getting a subprime mortgage loan. And if you've been paying attention to the news over the last few months, you'll know the subprime home loans have been a hot topic lately ... and for a bad reason.

Subprime lending has led to a "mortgage meltdown" over the past year or so. The media is also fond of the phrase mortgage crisis and other doomsday terminology. When lenders extend home loans to people with poor credit history, they do so by jacking up the interest rate. After all, these people have far fewer options when shopping for a loan that a person with excellent credit. They basically have to take what they can get.

This means they will pay a much higher interest rate on the loan.

Now we come to another piece of the mortgage "crisis" -- the adjustable rate mortgage. When lenders offer subprime loans to borrowers with poor credit, they often do it through the adjustable rate mortgage (ARM) loan. This type of home loan starts off with a lower interest rate (than a fixed-rate mortgage), but it will eventually adjust or "reset" to a higher interest rate.

In the case of subprime borrowers (who are already in a high-interest situation), this adjustment to an even higher rate can be the death blow to their homeownership.

Right now, this is happening in record numbers across the United States. Poor credit home loans are resetting to higher interest rates ... the homeowners can no longer afford the mortgage payments ... the lender forecloses on the home ... and thus you see the subprime mortgage "meltdown" / "crisis" that we are experiencing.

Now, this is not to say that all poor credit home loans are bad. But if you are a home buyer with bad credit, you really need to do some homework:

• Determine your maximum budget for a monthly mortgage payment.
• Shop around for a home loan and see what kind of interest rate lenders will offer.
• Find out if the offered interest rate is on a fixed-rate loan or an adjustable mortgage.
• Before choosing an adjustable rate mortgage, read this guide to ARM loans first.

Of course, the best thing you can do it improve your credit score altogether. This will help you secure a lower interest rate on your home loan and lower the mortgage payment as a result.

I hope this guide to poor credit home loans helps you in your quest to purchase a new home responsibly. Good luck with your home buying ventures!

P.S. -- If you're not even sure where you fall on the credit scale, you'll want to get a copy of your free credit report and scores.

Buying a Home After Bankruptcy - There is Hope

Many people think it's impossible to buy a home after filing for bankruptcy, that the act of bankruptcy ruins their credit for all eternity.

This is simply not the case. Granted, if you're buying a home after bankruptcy, you'll face certain obstacles that the typical home buyer wouldn't face. But it's certainly not impossible ... not by a long shot.

For this blog post, I've hand-picked a few articles I think will be helpful to you. And as always, remember that these articles don't take the place of a financial advisor. Always seek help from a professional when buying a home after a bankruptcy filing.

Recommended Reading

• Buying a Home After Bankruptcy - Are You Ready?
• Getting the Best Mortgage Loan With Bad Credit
• Bounce Back Fast After Bankruptcy (off-site, MSN)
• Buying a Home After Bankruptcy (off-site, Quicken Loans)
• Bad Credit Mortgage 101

Happy home buying!

~Brandon

Buying a Home With Bad Credit - 8 Steps to Success

I just posted a new home buying article to the main website. Mortgage specialist Ron Stone offers 8 steps to success when buying a home with poor credit. He also explains how you can do it with no money down.

This well-written piece is a road map to buying a home with bad credit. You'll learn how to obtain and review your credit report, how to shop for an agent who can help, and a lot more.

Read the article

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