Buying a Home with Bad Credit
An unfortunate myth that most people believe is that
you must have perfect credit and a large down payment
in order to buy a home. This just is not true.
The amount of down payment you must have to buy a home
with bad credit will vary, but generally, the worse
your credit the larger down payment you will be required
to have. While somebody with good credit may get away
with zero down, a person with poor credit may have to
come up with 20 percent to 30 percent down. Having $30,000
cash to put down on a $100,000 house will make almost
any mortgage banker drool, regardless of how bad your
credit may be. Making a payment of half down will virtually
guarantee that a person with even the worst credit will
get a mortgage.
Even without a large down payment, there are still
ways to get the job done. You should expect to have
to pay more--your mortgage payment will be substantially
higher than that of your neighbor with good credit,
even though you may both be buying the same type of
ranch house at the same price and with the same down
Subprime lenders work with people who have poor credit,
and often are willing to take the borrower’s entire
situation into consideration when making a decision.
Private mortgage insurance (PMI) is another tool often
used by subprime lenders and borrowers with poor credit;
this instrument provides a guarantee to the lender that
the note will be paid off if you default.
Other types of “creative” financing include
owner financing, in which the owner finances part, or
all, of the mortgage amount directly instead of through
a bank. In the worst cases of bad credit, it may be
necessary to put the American Dream on hold for a year
while you work on paying down debt and improving your
credit score. But regardless, eventually, there will
be a way for anyone with the desire to own a home.