How to Get a Mortgage With Bad Credit

Finance

  |  

Mar 13, 2014

  |  

By: Michele Lerner

  | 

If you have a credit score that’s considered fair, poor or even bad, you may be assuming that qualifying for a mortgage is out of the question. While that’s true for some would-be borrowers who need to improve their finances as well as their credit, there are some mortgage options for homebuyers with less than perfect credit.

Your Credit Profile

Mortgage lenders rely heavily on your credit score to evaluate your qualifications for a home loan because your score indicates how you have handled credit in the past, which serves as a predictor of your future repayment pattern. According to Credit.com, excellent credit gets a score of 750 or above; good credit, 700-749; fair, 650-699; poor, 600-649; and bad credit is a score under 600.

Rather than guess at your credit profile, you need to request your free credit report and pay a small fee to get your credit score from www.annualcreditreport.com. Fix any errors and take steps to improve your score with improved financial behavior before applying for a mortgage loan. A lender can help you determine which steps will boost your credit score fastest, but depending on your situation it could take at least several months or even a year before you can push your score high enough to qualify for the lowest interest rates on a conventional loan.

Loans for Borrowers With Poor Credit

In the thick of the housing boom borrowers were approved for home loans without providing documentation of their income and assets. Subprime lenders approved loans for borrowers with low credit scores, although they often charged higher interest rates to those borrowers. Since the housing crisis, the majority of subprime lenders went out of business, but, depending on your circumstances, you may still qualify for a home loan.

The most commonly used loan product for borrowers with lower credit scores is the Federal Housing Administration’s loan program. The FHA insures lenders against potential default and requires a minimum credit score of 580 or above for a loan with a down payment of 3.5%. Most lenders, though, require a credit score of 620 or 640 and above to approve an FHA loan. In addition to your credit score, you will need to provide full documentation of your income and assets and meet the lender’s debt-to-income ratio, which is typically a maximum of 41% to 43% of your monthly gross income that goes toward the minimum payments on all of your revolving and installment debts.

The downside of FHA loans is that they have higher mortgage insurance requirements than conventional loans. The mortgage insurance payments must be made for the entire life of the loan unless you make a larger down payment. However, FHA mortgage rates are comparable to conventional loans regardless of your credit score, so you won’t be stuck paying a higher-than-average mortgage rate.

Special Programs for Credit Challenges

The financial crisis and recession hurt a lot of consumers who lost their homes and jobs. If your bad credit is a result of a personal financial hardship rather than your own mismanagement, you may qualify for the FHA’s “Back to Work” program, which allows borrowers to qualify for a home loan more quickly after a period of unemployment or reduced income.

The only way to know with certainty about your ability to qualify for a mortgage is to meet with a lender who can go over your individual financial circumstances. There is no charge to consult a lender, so even if you are not ready yet to get a loan approval, you can still benefit from a lender’s advice about how to prepare for a loan application.

A Majority of Today’s Homebuyers are looking for New Homes

By Dennis Walsh

A national survey finds that a majority of homebuyers want to include brand-new homes in their search. At the same time, a small percentage of real estate professionals have the training, market knowledge and builder relationships to professionally support their clients in the new-homes arena. As a result, the majority of brokers and agents are professionally meeting the needs of only 46 percent of today’s homebuyers! Are you overlooking one of the most powerful keys to maximizing real estate success?

Can you imagine Lowe’s or Home Depot advertising this message: “We’re here with everything you need to meet 46 percent of your home improvement needs.” They might even add, “For the other 54 percent of your home improvement needs, you’re on your own. Good luck.”

It’s not only hard to imagine, but this would be a business model clearly destined for failure.Yet, as crazy as that might sound, this is not too far off from the message many brokers and agents are sending prospective homebuyers. I’m not suggesting anyone is doing this intentionally, but consider the following facts to better understand this reality.

A national survey of active home shoppers across 25major metropolitan areas conducted by BHI Inc., a consortium of 32 of America’s largest home builders, found:

• 19 percent are determined to buy a brand new home and will not consider resales.
• 35 percent want to explore both new and used homes in their search.
• 46 percent are focused on searching the inventory of resale homes only.

I’m sure you don’t find these numbers surprising. In fact, in our extensive travels, we find most brokers and agents feel that a full 60-70 percent or more of home shoppers in their markets want to include new homes in their search. Yet, the same brokers and associates acknowledge that less than 5 percent of all real estate professionals have undergone the specialized training, gathered the market research, and have established the builder relationships necessary to support the needs of this majority of buyers interested in new homes! Armed with this knowledge, I can’t imagine any real estate professional not recognizing that it’s essential to be prepared to fully meet the needs of today’s homebuyers—or a broker consciously ignoring the needs of a majority of prospective customers.

Not coincidentally, some of real estate’s most successful leaders do recognize the importance of new-homes expertise for real estate success:

“New-home business has always been important for resale—there’s clearly a relationship between the two.Our ability to help buyers across both areas attracts more buyers overall,” explains RE/MAX Chairman and Co-founder Dave Liniger. “Builders are beginning to prosper again, so agents absolutely need to make sure they are prepared and arm themselves with education in new home sales."

"I’m very enthusiastic about new homes and urge everyone in real estate to prepare for the boom in new-home sales.” Ron Peltier, chairman and CEO of HomeServices of America, talks about today’s new-homes opportunities in contrast to the recent REO market. “If a sales associate is not knowledgeable in the new-homes arena, they are going to miss out on an even greater opportunity. We all saw how REOs became a dominant part of the business for several years. What’s important to recognize is that new homes are a much bigger opportunity than this — even bigger than it was 10 years ago. There is tremendous pent-up demand, growing household formation and interest rates that still remain historically low. These factors should continue to play out for many years. Together, this adds up to a massive, long-term opportunity.”

Helen Hanna Casey, president of Howard Hanna Real Estate, has grown up in a brokerage always active in new homes. “We expect to see growth in both new-home buyer and builder representation. With today’s tight inventory and growing buyer demand, we need to focus on new homes to satisfy the needs of the market. At the same time, builders are afraid to put up spec homes, which means agents need to apply new sales skills and strategies in this changing market.”

As you consider these opportunities, I highly encourage you to position your company to fully support the needs of all prospective buyers by adding real new homes expertise to your mix of professional services.Get your agents the proper training and you’ll empower them to take their business, and yours, to higher levels of professionalism and success.

New-Homes Market Continues to Play Leading Role in Real Estate Today, and Long into the Future

Views (1511)0 Comments1/27/2014 12:00:00 AMBy Dennis Walsh

Scott MacDonald, real       Scott MacDonald   estate investor, real estate broker and owner of RE/MAX Gateway has received numerous accolades, including a nomination for REALTOR® of the Year and induction into the RE/MAX Hall of Fame and Lifetime Achievement. With over 25 years of experience, MacDonald is highly regarded for his real estate expertise and has participated as a speaker at the RE/MAX International Convention, RE/MAX Broker Owner Conventions, RE/MAX Regional Broker events and RISMedia’s CEO Exchange.

This past November, he took part in my New Home Sales Success session during the NAR Conference. Here’s some of what he shared with the audience.

Dennis Walsh: How would you describe your new-homes business?

Scott MacDonald: Our new-home sales business is pretty diverse. We do MLS input and offer a guarantee buy/lease and interchange program. We also have a relationship with a multi-million dollar new-home sales center in Ashburn, Va., called Brambleton, the 4th best-selling new-homes community in the country. We have a referral agreement with them for when buyers and sellers come in unrepresented and they have a community channel on FIOS where we’re interviewed about current market conditions. We host meetings at their facility and act as a general resource for them. In addition, we’ve hired a team that focuses on infill lots, tear downs and assemblages for smaller builders who used to be affiliated with national builders.

DW: Are you focused on builder representation, buyer representation or both?

SM: On the infill business, we represent the builder, and with our general brokerage, we represent buyers mostly.  

DW: How has new-homes business impacted your overall real estate business?

SM: In the late ‘80s and early ‘90s, I worked with one of the largest developers in the Washington area who did land development, then sold lots to builders who we represented in doing their sales. In turn, I would get the leads on selling their houses and follow-up with people who weren’t necessarily interested in their properties. Now we have an office in Loudoun County, the fastest growing county in the country the last two decades. A majority of what we sell in that office is new homes. Lack of inventory has driven many buyers to new homes, and the desire to be close to DC has spurred the in-fill and tear down market. The new-homes segment drives a great deal of both new and resale home business our way.

DW: How will your approach to new-homes business change this year?

SM: I plan to get more aggressive with our guarantee buy/lease program for builders. An example of the need for this is found at NVR, one of the largest home builders in the country, who just reported a 19 percent cancellation rate. NVR takes contingent contracts and our program is situated ideally to mitigate this problem for them.

DW: Are you changing your approach as the new market emerges?

SM: Funny you should ask. We just opened an office in Arlington located three miles from DC in order to work the tear down/in-fill market.

DW: What are some of the current trends in your market?

SM: Buyers are migrating to large planned developments where elementary, middle and high schools are strategically located in the neighborhood. They also have shopping, restaurants, entertainment and multiple “health” options like a gym, pools, jogging trails, etc. Other buyers are moving closer to DC and opting for location over amenities. 

DW: How about design trends?

SM: Further out, bigger is better. Closer in, the focus is functional floor plans with no wasted space. One thing we’re lacking is first floor master bedroom options, which builders are moving to accommodate. People still like the two-story foyer, but they’re less excited about the two-story family room. 

DW: How do you market yourself in the area of new homes?

SM: We visit new-home sites and drop off brochures. We also meet with builders at their sales meetings to discuss our program. When they come to our meetings, we reverse market them by finding out where they’re looking for land, where they’re located and if they’re open to utilizing our program. When we come across potential lots worthy of subdivision, we take the properties to them. Additionally, we network with local New Homes Guide reps to get in front of builders.

DW: What strategies do you have in place to grow your business success?

SM: Not only are we going to bring on more builders to market our program to, we’re also going to find more tear down/assemblage opportunities and continue to grow our relationship with the Brambleton New Home Sales Center. We’re also going to get more aggressive with our guarantee buy/lease program.  

DW: Any other advice you’d like to offer?

SM: As our success in the new-homes arena demonstrates, there’s almost unlimited opportunity, but it’s essential to arm yourself with the knowledge and expertise to serve both builders and new-home buyers professionally. I became a Certified New Home Specialist™ in 2007 and encourage everyone in real estate to take advantage of this educational opportunity. The new-homes market is growing quickly and will continue to play a major role in real estate long into the future.