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Buying a Home With Less Than Perfect Credit: It Can Be Done!

By Scott Hudspeth, Mortgage Specialist

Don’t be discouraged—if your credit is not the greatest, you still can probably get financing to purchase a home. In this market especially, sellers and mortgage lenders are not as stringent as you might think.

Step One: Check your Credit Report

Get your current credit reports from the three nationwide credit bureaus – Experian, Trans Union, and Equifax – plus obtain our FICO (Fair, Isaac and Co.) scores from these three credit bureaus. Most mortgage lenders obtain a 3-in-1 combined credit report on prospective borrowers so I checked all three of my credit reports.

You’ll notice that each credit bureau will have different information and a different FICO score. That’s because not all creditors-credit card companies, department stores, banks, etc.—report to each bureau. FICO scores from the three major credit bureaus can vary quite a bit.

FICO says consumers in the highest score range of 750-799 have a delinquency rate of 2%. But FICO scores below 500 have an 83% default rate, 500-529 shows a 72% delinquency rate, in the 550-599 range there is a 52% probability of delinquency, 600-649 scores show a 31% delinquency rate, and 650-699 have a 15% delinquency rate. Over 700 the delinquency rate drops to 5% up to 749. If your FICO score is 800 or over, you have a 1% delinquency likelihood.

Most mortgage lenders consider a FICO score above 680 will entitle you to the lowest interest rate. The www.MyFICO.com website provides lots of valuable insights on how to improve your FICO score.

Your credit score will be the number by which you are measured in many capacities as you seek credit from anywhere. But the criteria each creditor uses when deciding whether to extend credit, and how much credit to extend, varies widely. Some creditors won’t extend credit to anyone with a bankruptcy over the last 10 years. Others will extend credit if it has been discharged for a certain period of time.

What does FICO measure? The length of your credit history, on-time payments (even one late payment beyond 30 days hurts FICO scores), number of credit accounts, percentage of balances to available credit, collections, derogatory public records (such as judgments and unpaid property taxes), and number of recent credit inquiries with the past six months.

Get your 3-in-1 credit report before applying for any type of credit. Don’t worry-your purchase of your own credit report does not show up an inquiry on your report. Go to www.myfico.com for this report. The fee is nominal. If you find mistakes which are hurting your FICO score, each credit bureau includes either an online, telephone, or mail procedure to correct the errors. After you register an error, by federal law each credit bureau has 30 days to either verify their information is correct or remove unverified information. Ask for a free corrected copy of your credit report after the error is removed.

Building or Repairing your Credit

Avoid the “credit repair” firms that are advertised everywhere—they are scams. You may be able to find a consumer credit counseling agency, which shouldn’t charge a whole lot to help you clean up your credit.

If you have no credit, start building. The easiest places to get credit cards if you have no credit file are usually gasoline companies and department stores. If you buy a car, finance it – but be sure there is no prepayment penalty if you want to pay off the car loan in a few months – and be sure you finance with a major lender who reports to the credit bureaus.

If you filed bankruptcy, start rebuilding your credit as soon as you are “discharged” from bankruptcy court jurisdiction. If you filed Chapter 7 bankruptcy and were discharged from all or most of your debts (except secured debts, such as a real estate mortgage), be sure to pay all your obligations on time from now on. Bankruptcy will remain on your credit report for 10 years. Don’t go this route unless you have no other option. With this on your credit record, you will have a lot of trouble getting credit down the road.

That’s not to say you won’t get credit again. Some lenders will approve you for a mortgage only a year after discharge. However, your interest rate may be high.

Why Mortgage Applicants are Declined:

• no credit file (usually because the applicant pays cash and has little or no established credit)
• insufficient information in the applicant’s credit file
• insufficient income
• short time on the job – at least two years in the same field are usually required by most lenders
• slow pay and/or poor credit history indicated by a low FICO score
• judgments, garnishments, liens, or past bankruptcy
• accounts sent to collection agencies
• current bankruptcy which is not discharged
• foreclosure
• repossession (usually an automobile or furniture)

No credit or insufficient credit can often be overcome, such as by showing timely payment of rent and utilities. But the other reasons for “decline” are usually more difficult.

There are lenders who will risk lending to people with these credit problems, but the interest rate may be brutal.

 

Co-signing or Guaranteeing

My hard and fast rule is: never co-sign or guarantee another person’s credit. All the credit obligations co-signed or guaranteed by you will appear on your credit reports. If the primary obligor fails to pay, or pays late, the non-payment or late payment will show up on your credit reports and your credit rating will be adversely affected. You will also be expected to pay if the primary debtor doesn’t pay! Even if you pay, but the payment is late, your FICO score will be damaged.

Pre-Approval

First, get pre-approved in writing for a home loan. IF your FICO score is over 600, and you have adequate income, you probably can secure a mortgage. The easiest loans to get are FHA and VA home loans. Lenders will evaluate your income and whether the monthly housing payment will take more than 29 to 33 percent of your monthly household income. There is a lot of latitude here—I have seen home loans approved when the house payment will eat up 40 to 50 percent of a borrowers monthly income. But that has been in cases where the borrower had a high FICO score, stable income and little or no other debt and substantial amount of reserves.

So go ahead and get pre-approved from the mortgage lender that you decide upon. There shouldn’t be a fee for this. But, keep in mind that pre-qualification is not the same as pre-approval. Pre-qualification is essentially worthless. It just means that the lender thinks you may qualify for the loan. A pre-approval letter is issued after the lender evaluates the written loan application and verifies all of the information.

Types of Lenders

Mortgage brokers work with the borrower and the lender to broker the best loan. The big advantage offered by mortgage brokers is they have contacts with dozens, sometimes hundreds, of out-of-area lenders so they can match you with the best lender for your situation. If you have credit problems, a mortgage broker might be the best option to obtain a lender’s pre-approval letter. Make sure your pre-approval letter has a specific expiration date, and ask about locking in an interest rate. Also, make sure that you get, in writing, the broker’s loan fees.

Mortgage brokers may have contacts with wealthy individual lenders who loan mortgage money without checking the borrower’s credit or income. This comes with a high price, of course. If you only need mortgage money for a short time, such as one to five years, these mortgage brokers who don’t ask many questions can be worthwhile.

Banks, credit unions, and savings banks are direct lenders of their own funds. You will be working directly with the lender instead of a middleman. Keep in mind that loan officers are often paid commission. Another disadvantage is that these lenders have limited loan programs, and may not be able to help someone with credit problems.

Mortgage bankers loan their own funds but quickly sell the new loans in the secondary mortgage market. Major mortgage lenders such as Countrywide, Home Side Lending, and Wells Fargo Mortgage are mortgage bankers who originate home loans with their own funds and then quickly sell them into the secondary mortgage market.

Carry-Back Mortgages

You might be better off buying a home whose seller will “carry back” the mortgage financing for you. With seller financing, there is no loan application, no credit check, no long wait for mortgage approval by unreasonable lenders, no appraisal, no extra loan costs, and the buyer gets to specify the mortgage terms you want (such as 6% interest, 30-year mortgage term, etc.) in your purchase offer for the home. If the home seller doesn’t like the seller carry-back mortgage terms you offered, the seller can counteroffer with acceptable terms which you can then either accept or decline.

The best candidates for seller financing are homes:

• on the market for at least 60 days
• that are vacant
• paid for free and clear
• owned by people who don’t need immediate cash (such as retirees)

Assume an Existing Mortgage

This is similar to seller financing, when you take over an existing mortgage from the current owner. There are a couple of ways to do this:

• Purchase the home “subject to” its existing mortgage. This method works especially well with a highly-motivated seller who doesn’t have much equity in the home. “As the buyer, this method has virtually no risk for you. However, as explained earlier, there is a risk for the seller because, if the buyer defaults, that default shows up on the seller’s credit report but not on the buyer’s credit report. Like seller financing, no credit check is usually required.
• Formally assume the existing mortgage. The other method of taking over an existing mortgage is to assume its legal obligation. Home sellers should insist on being released by the lender from further liability after the buyer assumes the existing mortgage. But that’s the home seller’s problem, not yours.

Lease-Option

If you have poor credit and plan to own the homes for a short time, consider a lease-option to purchase. 

For More Information about Lease Option (Rent to Own) go to www.kalamazoorenttoown.com

Buying a home can be an emotional, time-consuming, and complex process. There are a few things that you can do to help make the process go as smooth as possible:

Check your credit

Before you apply for a home loan, regardless of your credit, it’s a smart idea to obtain a copy of your credit report from the three major credit bureaus and review the information. If there are errors or things that need to be addressed, it’s easier to address them before you have found a house, than after you have found a house and are trying to close your loan.

If you know that there are a few blemishes on your credit, let your lender know what they are, why they are there, and why you are a still good credit risk. Lenders look at your credit to determine how likely you will pay back the loan. If you had extenuating circumstances - like a loss of a job or medical bills - let them know so that they understand that it is not likely to happen again in the future. I recommend getting your report from www.myfico.com/12

Get approved before you buy

An approval means that a lender has reviewed your credit history, verified your assets and employment, and has approved your loan before you have found a home to purchase. As long as the home appraises for at least the purchase price, the loan should close.

Getting approved also gives you an advantage over other buyers. Your firm approval makes it easier for you to negotiate on the price of a home, than a person who is not approved or is pre-qualified.

While getting pre-qualified may sound official, it is really just getting an idea of what you can afford. It’s having a person plug in a few numbers that you give them - your monthly income and your monthly debt - and getting an approximate payment calculated. From the payment, the calculator can approximate the house price range that you can afford. No information is verified. Because your assets, income or credit is not verified, a pre-qualification has little value when purchasing a home.

Find a great buyer’s agent

Traditionally real estate agents represent the sellers in a transaction. When you are not working with a buyer’s agent, they are less likely to negotiate the best price or contingencies for you.

A buyer’s agent’s job and fiduciary responsibility (meaning legal duty) is to you, the buyer. Before working with an agent, establish if they are a buyer’s agent or a seller’s agent. After spending a lot of time with a Realtor, it’s natural to feel like you’re a team. But if they are not negotiating for you, then they are not on your team.

Learn about the neighborhood

Often times the house you find may be in a neighborhood that you’re not familiar with, which is ok. It just means that you’ll have to do a little more research. If you find a house that you like, ask for a list of the neighborhood properties that sold in the last year. How does your home rank? Is it at the top of the price range? If so, it might be hard to resell. Is it average or on the low end? If so, great - as the other home prices go up in value, they will pull your home’s value up as well.

Check out the schools - are they sought after? A good school district means your neighborhood will always be valued by families which are a great reassurance to purchase, not to mention the value-add if you have school-age children.

Next, contact the police station and obtain crime statistics? Are they acceptable to you? Sometimes, if they won’t give them to you, it could be a cause for alarm.

Talk to the neighbors. The more people you talk to, the better sense you will get of who makes up the neighborhood and how they will effect your time spent in it.

Check out the location of the shopping, police and fire stations, schools, and air traffic overhead. These are all things that might affect your property value or quality of your life.

Protect Yourself

Ask your Realtor for a copy of the documents you will be asked to sign if you decide to buy the house. Read them ahead of time so that you’ll understand the questions that you will be asked, the things you need to know, and the decisions you will need to make.

Have reasonable expectations

There is a lot of money at stake. No house is perfect. Understanding and remembering these two statements will help diffuse the negotiation stage, the inspection stage and the closing stage.

Emotions are high for both buyers and sellers. - The seller may have loving memories and years of sweat equity in the house. Maybe they are being relocated and don’t want to go. Understanding their motivations for selling will help you appreciate their situation and predicament during these emotional times.

There is a lot of money at stake for all the parties involved (and that includes the realtors) - Just remember that market value (the value of a home) is the price that a willing buyer and a willing seller can agree to. If you can not agree on a price, ask yourself: Is there something you missed? Are there comparables that support the price that they want? Are there motivations that might factor into the price they are demanding? In the end, does it matter? What is the house worth to you today and what do you think you can reasonably sell it for based on the amount of time you plan to spend in it? Think about the answers to those questions before you make your move.

No house is perfect - Always get an inspection. It might be a few hundred dollars, but it’s worth it. It’s the inspector’s job to find any problems with the house that could cost you thousands to repair down the road. Some inspectors have a tendency to over play the importance of their role and the items that they find. Get objective opinions that you trust before making a decision on an inspection report. Likewise, if an inspector says a foundation is cracked but its nothing to worry about - get a second opinion. Ask a handyman for an idea of how much repairs will cost and how complicated they are. The home buying process is an emotional, complex and time-consuming process, but it is worth it. Nothing compares to owning your own home in a neighborhood that you chose.

Despite the drop in home sales and the struggling economy, now may actually be a good time to buy your dream home. Prices are low, and it truly is a “buyer’s market,” with more home sellers than buyers.

No matter what is happening with the economy, your life goes on. You may be tired of renting, your family may be growing, or you could be getting transferred to another city. Whatever the case may be, buying a home now could be a very smart long-term investment. There are some really attractive 100% financing options still available that everyone needs to know about and take advantage of.

Even if you don’t have a large down payment or perfect credit, there are several lending opportunities, according to Amerifirst lending expert Scott Hudspeth.

FHA MortgagesThe Federal Housing Administration, a government agency created in 1934, provides insurance on some types of mortgage loans. An FHA-insured loan also allows you to buy a house with a zero down payment, ranging from zero to 3 percent and from a single family up to four units as a primary residence.

Zero to 3 percent down: You can have the seller gift this–better known as the “down payment assistance program”Low closing costs: Seller can pay up to 6 percent

Easy credit qualifying: No credit score needed for this program

FHA mortgages allow you to buy a home, fix it up, and include all the costs in one loan. Or, if you own a home that you want to re-model or repair, you can refinance what you owe and add the cost of repairs - all in one loan.The FHA insures your loan so that lenders can offer you better, more affordable rates. No matter what your family’s living situation is, the FHA can help you:

Purchase a HomeRemodel the Home you currently live in

Make Home Repairs

Make Energy-Efficient Improvements

Refinance up to 97.75% of the value of your home

Pull Cash out up to 95% of the value of your home

Qualification for FHA MortgagesQualifying for a mortgage loan can be hard to do if you do not have a lot of money for a down payment or even the best credit report. The best type of loan for you would be a FHA Loan. There are fewer restrictions for a FHA Loan Qualification as opposed to a standard mortgage loan.

You will need to have 2 years of steady employment. Not necessarily by the same employer but it is preferred. College counts as time on the Job.Your income should be similar or increasing for the past 2 years but not necessary all the time.

If you have declared bankruptcy, then it must be at least 2 years old and you will have to have good credit since then.

Foreclosures will also need to be older than 3 years and have good credit since then.

Compensating factors are allowed to compensate for the lack of any of above, 401k plan, high credit score etc etc.

Non Occupant co borrower is allowed for this program which works great for first time homebuyers that might not have every needed to get approved or are a full time student.

Government Steps in to HelpRural Development Guaranteed Housing is a special mortgage loan program intended to provide rural home financing for first-time homeowners are people who don’t own structurally sound or adequate housing. Besides purchasing a home, the loan also can be used to build, repair or renovate homes. An office of the U.S. Department of Agriculture, the Rural Development organization, underwrites the loans.

The home, new or otherwise, has to be located in a “rural” area, defined as being outside a Standard Metropolitan Statistical Area. It must be single family and owner occupied. The loan amount can be up to 100 percent of the property’s cost or appraised value. It is a true “no money down” transaction for the buyer, as the seller is allowed to pay all of the closing costs.

RD loans set limits on the borrower’s maximum adjusted gross income and also set maximum loan amounts based on the current FHA loan limits.

Advantages:

· No down payment required

· 30-year fixed rate

· 102 percent loan-to-value of appraised value allowed to roll in repairs, closing costs.

· Finance closing costs if appraisal is higher than sales contract

· No Monthly Mortgage Insurance

· No cash contribution required from borrower.

· Unrestricted gifts: no need to document source.

· No maximum loan amount

· New manufacture housing allowed: cannot have been lived in.

· With 620 credit Score, no seasoning on bankruptcy or foreclosure: You can buy as soon as your score is at 620 with established credit. Loan expert Scott Hudpseth specializes in credit restoration and has helped 100’s of families with their credit profile.

· Competitive rates (set by underwriting lenders).

VA Home LoansMore than 27 million veterans and service personnel are eligible for VA financing. Even though many veterans have already used their loan benefits, it may be possible for them to buy homes again with VA financing using remaining or restored loan entitlement.

What is a VA-Guaranteed loan?

These loans are made by a lender, such as a mortgage company, savings and loan, or bank. VA’s guaranty on the loan protects the lender against loss if the payments are not made, and is intended to encourage lenders to offer veterans loans with more favorable terms. The amount of guaranty on the loan depends on the loan amount and whether the veteran used some entitlement previously. With the current maximum guaranty, a veteran who hasn’t previously used the benefit may be able to obtain a VA loan up to $417,000, depending on the borrower’s income level and the appraised value of the property. Your VA Regional Loan Center can provide more details on guaranty and entitlement amounts.

Before arranging for a new mortgage to finance a home purchase, veterans should consider some of the advantages of VA home loans:

No down payment is required in most cases.Loan maximum may be up to 100 percent of the VA-established reasonable value of the property. Due to secondary market requirements, however, loans generally may not exceed $417,000. This figure is subject to change each year.

Flexibility of negotiating interest rates with the lender.

No monthly mortgage insurance premium to pay.

Limitation on buyer’s closing costs allowed from the seller.

An appraisal, which informs the buyer of estimated property value.

Thirty-year loans with a choice of repayment plans.

New homes, which are appraised before or during construction, are inspected to help ensure compliance with the plans and specifications used for the appraisal and with VA minimum property requirements. All new houses, regardless of when appraised, are covered by either a 1-year builder’s warranty or a 10-year insured protection plan.

An assumable mortgage, subject to VA approval of the assumer’s credit.

Right to prepay loan without penalty.

VA performs personal loan servicing and offers financial counseling to help veterans avoid losing their homes during temporary financial difficulties.

. What can a VA loan be used for? To buy a home, a condominium unit in a VA-approved project, or to purchase a unit in a cooperative (co-op).To build a home.

To simultaneously purchase and improve a home.

To improve a home by installing energy-related features such as solar or heating/cooling systems, water heaters, insulation, weather-stripping/caulking, storm windows/doors, or other energy efficient improvements approved by the lender and VA. These features may be added to the purchase of an existing dwelling or by refinancing a home owned and occupied by the veteran. A loan can be increased up to $3,000 based on documented costs or up to $6,000 if the increase in the mortgage payment is offset by the expected reduction in utility costs. A refinancing loan may not exceed 90 percent of the appraised value plus the costs of the improvements. Check with a lender or VA for details.

To refinance an existing home loan up to 90 percent of the VA-established reasonable value or to refinance an existing VA loan to reduce the interest rate.

To buy a manufactured home and/or lot

Some buyers are hesitating to buy their first home now. Perhaps you are unsure because you’re worried about the real estate market, or you’re afraid you can’t qualify for a mortgage loan. Maybe you don’t want to make a move yet, because you’d like to wait until you think the market is going to hit bottom.

But did you know that RIGHT NOW is the best time to buy? Buying an owner-occupied house is not based on the market, it’s based on YOUR family’s needs and capabilities. If you can afford the monthly mortgage payments, then seize this opportunity to provide your family with the security of owning their own home. In fact, right now IS the best time to buy your first home. Why?

1. Lowest real estate values in many years. As you know, the real estate values are lower now than in the last few years. Will the values rise soon? Will they continue declining? It really doesn’t matter because…
2. Long-term appreciation. Although real estate values operate on a cyclical market (increasing, then decreasing, then increasing), over the long term, appreciation still averages about 3-5% in Michigan and many other states. So if you’re buying a long-term family home that you plan to leave for your children, the short-term market fluctuation shouln’t affect your plans.
3. High inventory level. Right now, there’s lots of houses on the market. Your Realtor® can help you choose from homes in established neighborhoods, bank-owed REOs, foreclosure short sells, and new homes offered by builders. In this buyers’ market, you’re in the driver’s seat!
4. More experienced real estate agents. The market fluctuation has weeded out many real estate agents, so the agents still doing well in sales are those quality, experienced agents.
5. More personal attention. With fewer buyers out there, real estate agents now have more time to devote to you, paying close attention to your needs. As a matter of fact…
6. Buyers are preferred. In today’s buyer’s market, buyers are highly sought after, because they drive the sales and therefore the market. Typically, real estate agents are focused on pursuing sellers, and often ignore buyers. But not anymore!
7. Sellers are more willing to negotiate. Quite simply: more houses for sale = more choices for buyers = more leverage to negotiate better price and terms! Your Realtor® can help you make offers and negotiate the best price and terms for your situation.
8. Great quality loans available. Yes, despite some things you may hear, borrowers can find terrific mortgage loans. And now they’re at all-time low, competitive interest rates. You can trust your loan application to a local, reputable lender with a track record of serving borrowers successfully for many years.
9. Loan payoff programs. You’ve heard of bi-weekly mortgage payoff programs, but now there’s a new method: an early mortgage acceleration program that can help you pay off your 30-year loan in as little as 8 years WITHOUT any extra payments! This totally new concept is mathematically sound, saving you $100,000 - $500,000 of interest (depending on your loan amount). Previous borrowers did not have this opportunity. For more information, visit www.amerifirsthoa.com
10. Tax break! Don’t forget that you can receive a mortgage interest deduction on your annual tax filing. It can be substantial enough to offset any additional expense of owning (versus renting). So now there’s no excuse!

Remember, you’re not buying for the appreciation. The main reason to buy a house is because you and your family would like to have a safe, secure, stable home. Another reason is that you can begin owning real estate with an owner-occupied investment, and later on you can buy a larger “move-up” house. So if your property appreciates, that is great, it’s “icing on the cake”, but not the main reason to buy your home.

Now it’s time to get out there and find your dream home. Start your search at www.Realtor.com which offers the largest listing of homes for sale online. It’s the number one search site for buyers across the U.S., and with good reason - it boasts the most inventory of property available. So don’t put it off any longer… Take the first step to fulfilling your family’s dream of home ownership today! Toll Free Number 800-466-5626 Ext 149