How to Buy a House with Bad Credit: The New Sub-prime Loan

mortgage%20documentBad credit? Late payments? Recent bankruptcy? Low credit score?

You might be able to buy a house even with bad credit, as long you have a sufficient down payment. Sub-prime loans and hard money loans are still alive and available.

These loans are designed to be temporary. The idea is that the borrower gets into the home they want now, before prices go up further, and then cleans up their credit so they can refinance into a good conventional loan within a couple years.

Here are a couple scenarios for today’s sub-prime loans:

Bad Credit Scenario #1
Credit score 550
Down payment required: 30%
Interest rate: 9.25% with 1 point

Bad Credit Scenario #2
Credit score 550 with a foreclosure one year ago.
Down payment required: 45%
Interest rate: 9.625% with 1.5 points

The New Breed of Sub-prime Mortgages

The big difference between these loans and the sub-prime loans of pre-2007 is that a large down payment is required. When it’s time to refinance, the home owner has the equity to do so. In the past, sub-prime loans were offered at low down or zero down, which made refinancing impossible — especially when values dropped and they found themselves owing more than their property was worth.

Are Sub-prime Loans a Good or Bad Idea?

Personally, I would not pay the high price for a sub-prime loan. I would rather wait until my derogatory credit was cleaned up and then buy. However, I love having options. This is America, the land of opportunity. And there are situations in which it makes sense for both borrower and lender to take a sub-prime loan.

As always, your comments are welcome. (To comment, see top of this article.)

Talk About a Match Made in Hell!

Bank of America has agreed to pay $2.43 Billion to investors as compensation for its decision to match-up with Merill Lynch and its toxic mortgage loans.

I remember when account executives representing subprime loans came calling on our office at the mortgage brokerage. They invited us to submit loans that couldn’t get approved anywhere else. You know, those “no income, no problem” loans.

There was even a loan called NINA. It stood for No Income No Assets. And no questions were asked. The borrower signed what was basically a blank loan application.

Beats me why squeaky-clean Bank of America thought it was a good idea to buy high-risk loans. Oh wait, I think I know. BOA was hungry for bigger profits, and since these loans carried higher interest rates, the insatiable desire for more money was fed.

Now, without admitting guilt (of course!), Bank of America will dole out more than two billion dollars to its investors who were duped into thinking the match between the Big Bank and Merill Lynch would bring them increased profits.