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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 payment.

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.