Over the last few months, I have received a number of phone calls from potential buyers of foreclosed properties who identify themselves has having bad credit.  At first, I thought this was a fluke -a random buyer or two who thought I may know of a program to sell distressed properties to people with a history of not paying their bills on time.  However, as of late, the calls have become numerous and as a result, I am posting this as a reality check for would-be home buyers.

First: if you know for certain that your credit is lousy, buying a home is probably the last thing you should be thinking of doing.  The best advice would be to figure out what you owe and then develop a plan to pay down those debts.  It may mean sacrifice or even taking a second job but there’s not a single solitary bank that wants to lend money to people who have demonstrated that they pay their bills occasionally.  While lenders will say to you that you only need to pay down your debts to a certain level, I would say pay down your credit cards and other lines to zero - then cut up your cards.  Granted, there are mortgage programs that are not credit score driven however they don’t ignore your credit history all together.

Second: if your home that you own is going into foreclosure, don’t expect to purchase another home before the sale date.  Mortgage lates are reported on your credit report even before the foreclosure.  While not the end of the world credit-wise, no one in their right mind would lend a mortgage to someone who has chosen not to pay on the home they currently own.  Many buyers a year or two ago purchased a new home and then let their old home go into foreclosure instead of selling it.  The banks are wise to this practice and exercise every precaution to ensure that they do not end up with such a client.

Third: if you’re broke, you’re not buying a house.  Best practices say that you should invest at least 20% of the purchase price as a down payment.  Most mortgage minimums are 3.5% for FHA and 10% for conventional.  There are mortgage products that will finance a home for up to 100% of the purchase price however this isn’t for everyone.  If you are going to go that route, you should at least have the money you would have used for a down payment in your reserves for an emergency or for when you sell.  The problem many buyers run into is that when it comes time to sell, they cannot afford to because of a lack of equity and then must request a settlement or short sale from the bank.

My work with sellers that have fallen on hard times has driven the point home that it is absolutely necessary for you to live debt free and well below your means.  If that doesn’t suit you, then you should either change your standards or increase your income.  When I purchased my first home in 2002, I put 20% down and had a little left in reserves for a rainy day that I had anticipated on growing.  Six months after moving into my new home, I was out of work and now relying on my savings.  Thankfully, I was able to find work in a few months, hold on to the home, and later sold it for a big profit.  There were many nights where I lied in bed, heart pounding, mind racing, as I was wondering how i was ever going to put that money I was not living on back.  However, as stressful as that situation was, it would have made it a million times more stressful if I was absolutely broke and facing the reality of losing everything.

So if you have bad credit or no money, start today with a game plan to improve your situation before you start thinking of purchasing a home.

Charlotte NC Homes