Even with a bankruptcy, bad credit, and no credit it is still possible to get a bad credit mortgage. Of course, the plain reality is that you will not get as good a loan as someone with better credit. The interest rates you get are based on your credit history including your FICO score. With a bad credit mortgage you will pay a higher interest rate and also be required to put down a larger down payment. The cheapest and sometimes easiest route to take is to wait 3 – 4 years, improve your credit score and then apply for a loan. But, if you think you want to try buying a home with a bad credit mortgage, let me give you the basic run down of what to expect.

In some ways, a bankruptcy isn’t the worst thing that could happen to your credit. Since you can only file bankruptcy every 7 years, lenders will know that for at least another 7 years you can’t legally escape your financial obligations. Unfortunately, they do take note of the fact that you may have gotten over extended in the past and they may be reluctant to qualify you for an amount that someone with better credit may get. To get the best rate possible after a bankruptcy, you will have to wait 3 – 4 years. Also, expect to put down a large down payment of about 20% – 30%. The lender wants to ensure that you are financially invested in the house and that you will also incur heavy losses if you default.

In the case of a foreclosure, you may qualify for an FHA loan after as little as two years. FHA loans require a minimum down payment, sometimes as low as 3.5%, so it may be worth it to wait a couple years before realizing your dream of home ownership. Before the housing melt down started, you used to be able to get mortgages for 100%  of the homes value from some banks and sub prime lenders, understandably this has proved to be a very risky venture and these loans are no longer available for people needing a bad credit mortgage.

Your FICO Score Is The Main Determining Factor In The Interest Rates You Will Get

This chart is an example given by FICO as indicative of the impact your FICO score will have on your credit.

If your FICO® score is…            Your interest rate is…             And your monthly payment will be…
                                       National interest rates, updated daily
   760 – 850                                         5.07%                                                      $1,169
   700 – 759                                         5.29%                                                       $1,199
   680 – 699                                         5.47%                                                       $1,222
   660 – 679                                         5.68%                                                       $1,251
   640 – 659                                         6.11%                                                       $1,311
   620 – 639                                         6.66%                                                       $1,388

For a $216,000 house with a traditional 30 year fixed-rate mortgage you can see how your payments will increase as your FICO score decreases. An interest rate difference of even 1% over the course of a 30 year mortgage will add up to potentially thousands of dollars as you can see in this example. The home buyer with an excellent FICO score of 760-850 will be paying $219 a month less than the buyer with a score in the 620-639 range. You can begin to see how quickly this adds up, in this example the bad credit mortgage will cost $2,628 more per year.

Seller Financing

Another possible option for a bad credit mortgage is to rent to own or find a home with seller financing. With a rent to own, you would typically pay a higher rent with a percentage of the rent going towards a down payment. After a set period you may have to qualify for a traditional loan if the seller isn’t financing so you need to be sure that you can meet the terms of the rent to own agreement or you may lose all or part of your down payment. In the case of seller financing, it is exactly what it sounds like, the seller acts as the lending agent. This can be a beneficial arrangement for both the buyer and the seller as there are no middle men such as realtors and banks driving up closing costs. With seller financing, because expenses are kept low, the loan conditions can be quite favorable for a buyer. In both of these examples you are still advised to hire an appraiser and an attorney to review the paperwork to make sure you understand all the conditions outlined in the sales contract.

Without a doubt, the best way best possible to get more favorable loan conditions is to wait it out for about 3 years and work on improving your credit history and your FICO score. But even if you don’t want to wait, it is good to know that you still have some options available to get a bad credit mortgage.

1)  Pay your bills on time.

2)  Reduce the amount of outstanding debt you owe.

3)  Don’t keep applying for new credit cards (don’t cancel the ones you  have, just stop using them and pay them down). 

4)  Make sure to look at your credit report once a year to keep an eye on it, this helps you correct mistakes and keep an eye out for possible identity theft. A good way to watch your credit is to pull up just one of your free credit reports every three months that way you are rotating your free reports and can see how things are progressing.

5)  If you have a limited credit history and feel this could be working against you, you can get what is referred to as a secured loan or a credit building loan. This basically means that you give the bank $1,000 and they then loan you $1,000. Seems odd perhaps but this is a valid way of building up your credit history.

6)  Get a credit card – but only do this if you have no credit history at all. Sometimes it is easier to get a store credit card so this may be a good route. Charge a very inexpensive item and pay for it over time. Only buy something for like $50 because you’re trying to improve your credit score not pay huge amounts of interest. Be sure to make all your payments on time, because even one late payment can have a negative impact.

Your overall FICO score will determine what kind of rates you will get from your lender. Your FICI score applies to all loans – personal, car, boat, and home. The higher your score, the more favorable your interest rates will be.

Your FICO score is determined by these 5 factors:

1) Payment History (35%) – If you always pay your debts on time and have no bankruptcies this is a positive.

2) Total Amount of Debt (30%) – This is the measure of all the accounts that you have open. FICO also measures the amount of credit you have available vs. the amount you are using and factors that in here. For example, if you have $20,000 available on a credit card, but only have an outstanding balance of $200 this is obviously much better than being maxed out at the full $20,000.

3) Credit History (15%) – A longer credit history is generally better, but if the rest of your credit report is good, you can still get a good FICO score.

4) New Credit (10%) – Showing a sudden increase in seeking new credit may lower your score. When a bank runs your credit history this may very well impact your score by up to 5 points. But FICO takes into consideration multiple applications for a specific loan. For example, if you are shopping around for a more competitive house loan rate and you have your credit checked by multiple lenders. However, it is advised to get these multiple checks done in a condensed time frame, like a 30 day period, so that FICO can clearly see your intensions and so your score doesn’t become adversely affected.

5) Other Considerations (10%) – With a longer credit history, it is considered good to have diversity in your debt. It would be a plus to have a mix of credit card debt, car loans, property loans and personal loans.

Real Estate Agent Commission – This is a true buyers market, virtually everything is in the buyers favor at this time. The standard realtor commission used to be 6%, this was an industry standard that held true for many years but the market has changed and it’s entirely up to you to negotiate the best deal possible for yourself. A lot of people are uncomfortable with the whole negotiating process but it is not considered rude or inconsiderate but rather just part of the normal procedure. If you have hired a professional realtor, they will not be offended if you ask if they are willing to accept a lower commission. In this market, real estate agents are competing heavily and if you are a qualified buyer, I almost guarantee you’ll be able to find a realtor who will accept a lower commission.

House Price – This is an obvious one but it needs to be touched on. In this market, cash is king and you can scoop up some real estate deals if you bide your time and do your research. Before making an offer on a house find out how long the house has been on the market, what are comparables going for, what did the house sell for originally, and has the price been recently reduced. The longer the house has been on the market, the more desperate the seller is to sell. But, be cautious and also consider that the reason the house hasn’t sold is because the owner has set an unrealistic sale price. A realtor will be able to advise you on these points. I heard it said once that when you make an offer on a house, if your not a little bit embarrassed that your offer is too low then you offered too much. I think this is true. Go low; it’s not your problem if the home owner is insulted, you’re trying to get the best deal possible for you and your family.

Loan Origination Fees – Loan officers who work in banks and other lending institutions like credit unions are usually paid by commission. In some instances they may be paid only straight commission with no salary and the loan origination fees you pay are their salary. The loan origination fees are typically 1% of the sale price and the loan officers gets a percentage of that, about 40% – 70% with the bank keeping the rest. In some cases, they work on a tiered scale where if they close a certain amount of loans they would go up to a higher level and then get a larger percentage of the loan origination fee. In cases like this, if the loan officer is short on loans, it is in their best interest to work with you so that they can get up to the higher level for the month or quarter and then they would make money anyway.

Home Appraisal – When buying an older home, a home appraisal or inspection is often required and should definitely be requested by you the home buyer. This is usually a smaller fee but it may be negotiable.