Bad Credit? Buy A Home
“What is your credit score?”
That was the question one of my best friends asked me at lunch a few weeks ago.
After the six of us at the table shared our FICO (Fair Isaac Corp.) scores, my friend proceeded to tell us how one of his former apartment tenants just bought a condo even though his FICO score is only about 600.
The rest of us were very surprised.
Then we realized, today there is a home loan for virtually everybody who has a decent job and who wants to own a home, regardless of their credit.
Check your credit before shopping for a home.
As savvy home buyers and their real estate buyer’s agents know, it’s smart to check your credit reports before shopping for a home.
Fix any errors before applying for a mortgage so you will get the best possible interest rate and terms.
Although you can obtain one free credit report each year from each of the three nationwide credit bureaus, Experian, Equifax and Trans Union, at www.annualcredit report.com, that source will not provide your all-important FICO score, which most mortgage lenders use to qualify applicants.
Today’s mortgage lenders look primarily at your FICO score when qualifying borrowers.
In fact, I’m told most mortgage underwriters don’t even read the applicant’s credit reports if the FICO score is at least 680.
FICO scores are based on (1) the length of your credit history (the longer the better), (2) the percentage of available total credit currently being used (try to stay below 50 percent), and (3) your on-time payment history.
FICO scores do not consider your income, age, race, nationality, etc., assets, or cash down payment available.
The best place to obtain both your FICO score and all three credit reports is at www.myfico.com.
If the creditor doesn’t verify the information, such as a 30-day late payment, then it must be removed from your credit report.
Ask each credit bureau to send you a corrected copy of your credit report after 30 days.
After you’ve checked your credit reports, corrected any errors in those reports, and obtained your FICO score, it’s still not time yet to shop for a house or condo.
The next step is to get pre-approved in writing by an actual mortgage lender. If your FICO score is below 620, look for a mortgage lender specializing in subprime mortgages.
To illustrate, I’m told that Wells Fargo Mortgage is not only the nation’s largest home loan lender, but also the nation’s largest subprime lender to home buyers with low FICO scores.
Be sure you obtain a pre-approval letter from an actual lender, not just a so-called "pre-qualification letter" from a mortgage broker.
If you have a low FICO score, a mortgage broker can obtain a pre-approval certificate from a lender who specializes in low FICO score mortgages.
Don’t let lack of cash stop your home purchase.
In today’s "buyer’s market" for houses and condos, meaning there are more residences listed for sale than there are qualified buyers, sellers and lenders are becoming very flexible in their quest to make sales.
Prospective home buyers who have good income and good credit, but little cash, should consider 100 percent "nothing down" mortgages.
Some lenders even offer 103 and 107 percent mortgages to include closing costs in the mortgage amount.
However, the monthly payments on low-down-payment loans can be high.
But home buyers who plan to fix up their home purchases to increase the market value might want to proceed anyway and then refinance in a year or two.
PMI premiums, which cost $100 or more per month, protect the lender if the borrower defaults.
A better alternative to PMI is to obtain a first mortgage of 80 percent or lower, and a seller carryback mortgage or a home equity loan for the 20 percent balance of the purchase price, thus avoiding PMI premiums.
Alternatives to obtaining a new mortgage: If you have really bad credit, or just don’t want to jump through a mortgage lender’s 100 flaming hoops, there are alternatives so you can still buy a house or condo, perhaps while you improve your income and credit situation.
- Summarized from: Robert Bruss, Don’t let bad credit stop you from buying a home, Bradenton Herald, Aug. 20, 2006
