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Buying a house with bad credit
RE/MAX Genesis
Wednesday, March 5, 2008 • Posted March 4, 2008 10:00 PM

Rumors abound that anyone—no matter how bad their credit is—can buy a home in today’s real estate market. While some lenders are willing to take on riskier loans, you may pay the price in premium interest rates, hidden loan fees, and other unfavorable terms. So what if you have substandard credit—or no credit? Can you get into a new house without winding up in the poor house? Buying a home with bad credit or no credit is possible. And knowing how to navigate the process will potentially save you money.

What’s your credit score?

Know what your credit score is. This will help you determine if you are getting a fair shake from lenders. It will also help you see what you need to do to improve your situation before applying for a home loan. Reputable companies that provide credit reports include Experian, Equifax and TransUnion. In addition, these credit reporting bureaus now use standardized scoring methods, giving consumers more accurate and consistent scores across the board.

Find a Realtor

Choose a Texas Realtor who specializes in finding homes for people with credit or income challenges. Talk to friends and neighbors. Interview several Realtors before choosing one, and ask for referrals. Once you have referrals in hand, call them. You need to make sure that you feel comfortable with your choice and that your Realtor can serve your special needs.

Explain your credit situation

Sit down with your Realtor and draft a well-thought-out letter, explaining your credit situation. If you have poor credit, your lender may ask you for an explanation. Be prepared. If your letter simply states that you couldn’t afford the payments, you are more likely to have your loan application denied. But if there were extenuating circumstances that contributed to your financial situation, include those in your letter. Some lenders will consider one-time occurrences as acceptable reasons for inadequate credit, including divorce or a medical emergency.

There are two very important items to include in your letter to the lender: the reason for your bad credit and why your days of poor credit are behind you. Convince the lender that the circumstances surrounding your impaired credit score are in the past. In addition, you should follow-up with a paragraph highlighting anything that may help the lender see you as a desirable client, including low debt-to-income ratio (particularly good if you recently filed bankruptcy), a big downpayment or job stability.

Talk to a lender

Find a mortgage broker or direct lender experienced in sub-prime lending. If you are credit challenged, you may find that working with a broker is your best option. Brokers work with multiple lenders and loan products, giving you a greater chance of success.

If you have bad credit, some lenders will require a higher downpayment. If you don’t have money for a downpayment, sit down with your Texas Realtor and discuss what closing-cost and downpayment assistance programs you might qualify for. If you are a first-time homebuyer or have not owned a home in the past three years, there is probably a housing opportunity initiative for you. Even if you don’t meet that description, there are many programs to investigate.

Be ready for some rejections

Prepare to hear some denials. While you may be one of the lucky ones whose loan application is accepted by the first lender, prepare yourself for some rejections. You may have to talk to a number of brokers or lenders before you find one willing to take on a riskier loan. If your credit score is very low and no lenders seem interested, you will likely need to spend the next 12 months boosting your credit worthiness.

Get pre-approved

Obtain a pre-approval letter for a loan from you lender. Get your financing in place before you start looking for a home. The most important reason for this is so that you relegate your shopping to the price range that you can afford. Some consumers plan backwards and find themselves in over their heads. Falling in love with a home before you even know if you can afford it sets you up for heartbreak or even worse—an unfavorable loan product that ends in foreclosure. Qualify first, and then shop for a home.

If you are credit challenged, following these steps can put you on the path to homeownership. Depending on your financial situation, you may find that obtaining a good loan product can be relatively easy or somewhat difficult. Don’t give up. People with impaired credit do successfully buy homes of their own. If you don’t think you qualify today, spend some time improving your credit. It may put you in a better negotiating position later. For more information on the homebuying process, I invite you to visit TexasRealEstate.com.

For services, contact RE/MAX Genesis at 830-833-2000 or lightfoot@moment.net.

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