You know you have bad credit, so how can you afford to buy a foreclosed home? It can still be a great deal and it all depends on how you juggle your financing. Bad credit often means higher mortgage rates, higher interest rates on loans or cards, and is often the result of bad decisions or persistent debt that hasn’t been wiped off your credit report. However, some options can help you buy a home at a significant discount despite a low FICO score. Here is how:
significant discounts
Buying a foreclosed property means you get a deep discount from the market price and that can lower the price of a) how much you have to get from a lender and b) your payments and interest rate.
The discount itself means you can pay less in the long run. It also means you have more options when it comes to homes. You can choose HUD homes or properties that have higher discounts, especially if you meet certain requirements.
Payments in cash
Many foreclosed properties, tax sales and real estate auctions will settle for a cash deposit or down payment when it comes to paying off the house. With others, you can pay cash up front, negating the need for credit since you won’t be applying for a loan to finance the home.
When it comes to buying foreclosures, this is the scenario where your credit score won’t affect the sale. All you have to do is win the offer or make the required payment in the required amount, which is often less than market value.
If you find that you need home financing, such as qualifying for a mortgage, then your credit score will affect your purchase. The lender may not approve you or may give you higher than average interest rates if you can get a loan. This is where you have to make a decision: wait until you can repair your credit or settle for a higher loan. In today’s economy, lenders are more wary of loans simply because many have defaulted on prior loans.
One way to check is to go through pre-approvals with the lender you’re interested in to see if you qualify for a loan. A note of caution: Most pre-approvals show up on your credit report even if you default on the loan and can lower your score further.
The bottom line is that it is possible to buy a foreclosed home even if you have bad credit, but it may be a longer or more expensive process for you. But there is still hope. Prices are cheaper, market values are a bit friendlier for borrowers and homeowners, and there’s always the chance you could improve your credit score later.
Cash purchases are also a good bet for investment or purchase, so you can focus your search on short-sale homes, tax sales, or some HUD properties that don’t require a credit check on your part.