A poor credit history will not prevent you from buying a foreclosed home, you just may have to work harder
Buying a foreclosed property can get you a home at a price lower than market value. There are still many foreclosed homes on the market and lenders and banks are eager to move these properties off of their books and into the hands of new homeowners. If you have bad credit, buying a foreclosure (like buying any other property) will be a challenge. If your credit is less than stellar, you may actually have a better chance if you’re pursuing a foreclosure. It is important to know that while you may still be able to buy a foreclosed home with bad credit, you’ll have some extra work to do.
Your financing options
If you want to buy a foreclosed home, you will either need to apply and qualify for a home mortgage or pay cash for the property. In some very rare instances, you may be able to pay a small amount of money toward the purchase of a foreclosure (say, to cover some of the immediate arrears and/or accumulated fees) and then assume the existing loan on the property and take over payments on it.
If you have sufficient cash reserves to pay for the property in question, your credit rating will not interfere with the transaction. If you plan to finance your purchase, poor credit makes it difficult to get a home loan - and probably more expensive as well. Although most lenders have tightened their lending guidelines, you may still get approved, just at a higher interest rate. Even if you can find a lender that will allow you to assume an existing mortgage on a foreclosure, you will need to have your credit and ability-to-pay evaluated for consideration.
One other consideration when evaluating your financing options for buying a foreclosure with bad credit is whether the choice you make will actually help you rebuild your credit score. If you pay cash for a foreclosure, it may not register with credit rating agencies. Taking out even a small loan and repaying it on time can go a long way toward reestablishing your credit rating.
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Proving income and moderate debt load
If you’ve determined that you want to pursue a home mortgage for the purchase of a foreclosed property, you will have to work with a lending institution and procure a loan. The financial documents you need to submit to get approved for a home loan are the same regardless of your credit history. Your lender wants to see that you have the income to make your mortgage payment and that your debt-to-income ratio is moderate. Your debt-to-income ratio is may be especially important in the case of a foreclosure as the bank will not want to loan you the money to buy a foreclosed property that you won’t be able to keep up on the payments for. The last thing a bank wants is to get a foreclosed property off its books only to have it return as a foreclosed property in the near future.
Some of the documents you will need to submit for consideration of a home mortgage include:
- Bank statements
- Pay stubs
- Tax returns
- Investment documents
Federal Housing Administration (FHA) loans
If you fail to qualify for a loan through a bank, mortgage broker or some other traditional source for home mortgages, you may qualify for Federal Housing Administration (FHA) government-insured loans with a lower credit score. The FHA is a program under the authority of the broader federal Department of Housing and Urban Development (HUD). FHA’s primary purpose of to back a number of loan programs aimed at assisting a wide range of homebuyers, but you will still need to meet certain minimum requirements. Because guidelines for FHA loans change from time to time, talking to a (HUD) housing counselor may be the best place to start a discussion about a government-insured mortgage. You can use FHA loans to buy a home in a traditional sale and to buy a home HUD owns because it was foreclosed.
The FHA recently reduced the mandatory waiting period for obtaining an FHA loan after a foreclosure, short sale, bankruptcy or other credit-damaging issue related to the economic crisis that began in 2008. This means that if you can prove your financial challenges were directly related to the financial crisis, and that your financial situation has improved and your finances have been stable for 12 months, you won't have to wait three years (or more) to apply for an FHA home loan. You can also ask a housing counselor about the financial requirements of the FHA's Back to Work - Extenuating Circumstances Program.
Family or hard lenders
Buying a foreclosure with bad credit is also possible with financing through an alternative private lender or investor. For example, you could borrow money from family member or even ask a family member with better credit to cosign on a more traditional mortgage. One of the benefits of obtaining a cash loan from a family member is that you may be able to negotiate a low interest rate or even a no-interest loan.
You might also want to investigate available loans through a private investor or what is known as a hard-money lender. You should know that down payments for this kind of loan are often significantly higher than with a traditional loan. You will typically pay higher interest rates for these types of loans and they often come with shorter terms or even substantial “balloon” payments at the end of the term.
If you’re particularly adventurous and like to dig your hands into construction and remodeling projects, there are some local, regional, state and even national programs that offer grants, stipends, partnerships and even low-interest loans for people willing to take over an abandoned foreclosure and rehabilitate it to the point of livability.
Financing first…always a good motto
It is usually a good idea to make sure you have financing in order before you begin perusing foreclosure listings - or any home for that matter. Purchasing foreclosed properties has become so popular in many areas that it is not uncommon for bidding wars to break out at foreclosure auctions or for there to be multiple offers and bidders on a real-estate-owned (REO) property sale. Usually, you will need to submit a pre-approval letter when you make an offer on a foreclosure property or REO. (A formal pre-approval letter is an acknowledgement from a lender that you have fully qualified for a loan up to a set amount of money.)
You can snag a great deal on a home by purchasing a foreclosure. While buying a foreclosed property when you have bad credit is not impossible, it may require more work to get the financing you need. Reply! can be of assistance on all aspects of your pursuits of a new home, including helping you find potential mortgage lenders in your area here.
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