Finding bankruptcy home loans is not difficult, but receiving favorable terms for the loan is. Major negative credit events damage a person’s credibility, and lenders will charge them accordingly. To buy a home with bad credit and a bankruptcy, be prepared to have a large down payment and to receive a double digit interest rate.
What They Offer
The standard down payment with a bankruptcy is 15-20% of the selling price. This is no guarantee a person will be approved, but it lowers the liability of the lender and increases the stake the borrower has in the home. Buyers will also pay 3.5-8% above the national average interest rate for their money. This increase results in tens of thousands of additional dollars spent on the home over the life of the mortgage. Consequently, the monthly house payment is higher also.
Additional fees and points are a consideration for a bad credit loan as well. Lenders may require private mortgage insurance and charge extra points which add thousands to the upfront costs. Another way sub-prime borrowers are taken advantage of is through high pre-payment penalties, which can also add up to thousands. To ensure the individual does not go from a bad credit situation to an even worse home loan, shop several companies for the best deal, and refuse to pay excessive fees and points.
Get a Better Offer
Unless the individual who filed bankruptcy has enough purchasing power to buy a home outright, the odds of finding a house note with favorable terms are low. Buyers in this position have alternatives, and the best option is to wait two to four years and repair the credit score during that time.
During this ‘waiting period’ it is important to look carefully at credit reports and eliminate any errors. Once this is done, build strong relationships with several creditors by opening up new lines of credit and establishing a flawless payment history. Ideally, the future home buyer will lower debt, save a large sum of cash to put down on the house, and have no bad debt outstanding.
No Waiting
If the buyer prefers not to wait, and has nothing other than a bankruptcy on their credit report, they can still improve their offers. Review copies of credit reports from all three reporting agencies and fix any errors. Write letters requesting the items discharged in bankruptcy be removed from the report, and dispute any incorrect information.
A steady source of income is a necessity, and it helps if the job has been held for several years. If there are still some debts the buyer is paying on, these should be reduced as much as possible; the lower the debt to income ratio, the better the chances of getting a loan. As mentioned previously, a large down payment is a common requirement. If necessary, borrow from friends and family, or sell personal items to raise funds.
Buyers with good and bad histories need to compare several lenders before accepting any offers. Take the time to scrutinize every document, and if the deal seems flawed, get an objective professional opinion.
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