Management Services

Don’t Worry!

Put your fears 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 (SEASONING REQUIREMENTS)

1. The period between bankruptcy filings is seven years, but the ding to your credit report stays for 10 years.

2. For better rates with a conforming loan, the wait is four years after filing bankruptcy.

3. FHA guidelines are two years after a foreclosure, which means you could qualify for as little as 3.5% down.

4. Hard-money lenders will often make loans six months after filing bankruptcy or a foreclosure, but will 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.

5. 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:

1. A bankruptcy filing gives you a "fresh start."

2. The lender knows you have no debt.

3. You can't file bankruptcy again for another 7 years.

4. Show steady employment on the job for one to two years.

5. Earn a regular salary or wage (this does not apply to self-employment).

6. Save a down payment of at least 2.5%.

7. Avoid late payments and continue to pay your bills on time; do not fall behind.

How FICO Scores Affect Interest Rates

I spoke to a Mortgage Broker 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 $60,000 amortized loan at 7.5% would give you a monthly payment of $378.

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 $60,000 amortized loan at 8.75% would give you a monthly payment of $425.

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 $60,000 amortized loan at 9.3% would give you a monthly payment of $446.

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 $60,000 amortized loan at 9.75% would give you a monthly payment of $464.

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 $60,000 amortized loan at 12% would give you a monthly payment of $617.

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% and pay a monthly payment of $355 on a $60,000 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 $262 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.

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.