How to buy a home with bad credit

By Bob Bruss

October 05, 2007

Editor's note: Robert Bruss passed away on Sept. 26, 2007. This was one of the last real estate columns he wrote. Inman News is publishing Bob's last work as a final salute to the nation's most well-known real estate writer.

If you want to buy a house or condominium, the current buyer's market means it is a great time to be a buyer. Sellers are eager to sell. Equally important, their real estate agents are anxious because home-sales volume is down in most cities.

Even if you have bad credit, if you have good income you can probably buy a home. Working with a savvy buyer's agent is the best way to (1) find a house or condo you want to own and (2) then finance it, especially if you are "cash challenged."

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MAYBE YOUR CREDIT ISN'T AS BAD AS YOU THINK. Before shopping for a home, it pays to check your credit reports from all three nationwide credit bureaus, Experian, Equifax and Trans Union. You can get one annual free credit report from each company at www.annualcreditreport.com.

However, those free credit reports will not provide your very important FICO (Fair Isaac Corp.) credit scores. Today's mortgage lenders look primarily at your FICO score, rather than your credit reports.

FICO scores are based on (1) the length of your credit history (the longer the better so don't close out your oldest credit cards); (2) the percentage of available total credit currently being used (50 percent or lower is considered good); (3) your on-time payment history; and (4) number of recent credit inquiries (don't apply for credit within six months before buying a home).

Don't be fooled by credit scores other than FICO. Most lenders look only at FICO scores, which range from 350 to 850, to determine eligibility.

If your FICO score is 700 or above, you will get the best mortgage interest rate. Between 620 and 700 you should be able to get a home loan, but at a slightly higher interest rate. Below 620, however, each lender has its own rules.

The best place to obtain both your FICO score and all three credit reports is at www.myfico.com. For about $45 you can instantly receive this vital information for home buyers.

Study your credit reports and follow the directions to correct any errors. For example, a few years ago my FICO score was depressed because one credit bureau said I owed unpaid real estate taxes on a property I had sold. Although it was a hassle to get that error corrected, my FICO immediately shot up after that derogatory item was removed.

Each credit bureau has 30 days to "verify" any incorrect information you challenge. If the creditor doesn't verify a bad report such as a late payment (most don't reply within 30 days), the credit bureau must remove it from your report. Be sure to check all three reports and ask for corrected copies after 30 days.

CONSIDER GETTING PREAPPROVED IN WRITING FOR A MORTGAGE. If you have a FICO score of 620 or higher, the next step is to get preapproved (not just prequalified) in writing by an actual mortgage lender.

Business is slow now so lenders will welcome your inquiry. Most lenders won't charge any upfront fee because they know you are likely to come back when you find the house or condo you want to buy with your preapproved mortgage.

Mortgage brokers, mortgage bankers and direct lenders such as banks and credit unions can arrange your preapproval letter or certificate. Despite what you read in the newspapers and hear on TV and radio, mortgage lenders are still eager to make loans.

Just because a lender preapproves you does not obligate you to borrow from<