• Buying a Foreclosure Home With Bad Credit

    By Brandon Cornett | © 2013 All rights reserved

    Reader Question: "I have heard that I can get a really good deal by purchasing a foreclosure home (instead of a regular listing). So I want to explore this option. But the problem is that I have a bad credit score right now. Is buying a foreclosure with bad credit any easier than buying a regular home?"

    You've heard right about the discount potential of foreclosed homes. According to a recent (May 2011) report from RealtyTrac, distressed properties in the U.S. sold for an average discount of 27 percent. "Distressed" refers to houses that are in some stage of the foreclosure process. The discount is a comparison between the sale prices of distressed properties and normal (non-foreclosure) properties.

    A 27-percent discount is pretty significant. Let's say there are two homes with a market value of $250,000. One is a foreclosed home, and the other is a regular sale. If the distressed property was discounted by 27 percent, like the average reported by RealtyTrac, it would sell for around $182,000. That's a big price reduction. It's why home buyers and investors are drawn toward foreclosure homes in the first place. There is a potential for big savings.

    That's the good news. Now for the bad. Buying a foreclosure home with bad credit might not be possible for you. It really depends on how you plan to finance the purchase.

    Buying One With Bad Credit

    If you plan to buy a foreclosed home at a real estate auction, which is one of several ways to purchase a distressed property, you would probably have to pay cash for the home. It's just like any other type of auction in that way -- you're expected to pay for the item (in this case a house) immediately following a successful bid. In most cases, anyway.

    So in that scenario, your credit score wouldn't matter because you'd be paying cash for the foreclosure property.

    Of course, if you don't have that kind of investment cash to put down on a foreclosed home, it's another story entirely. In this scenario, your credit score would be a factor because you would have to get a mortgage loan.

    What is the real question you are asking here? If you're asking about the possibility of buying a foreclosed home with bad credit, then the answer is yes. You can do that. You'll just have to pay cash. But if you're asking about mortgage loans, the answer becomes more complicated. You might not be apple to secure financing from a mortgage lender if your credit score is too low.

    Let's talk about the process that takes place when a homeowner goes into foreclosure:

    When homeowners default on their mortgages, the property will generally be sold in one of two ways. It might be sold before the foreclosure process through a real estate short sale. If the property doesn't get purchased through an auction, it will go back on the market as a bank-owned foreclosure. You've probably seen plenty of these properties in your area, given the current state of things. There are plenty of bank-owned homes in most areas.

    [Related survey: 83% of buyers comfortable buying bank-owned homes]

    From a financing standpoint, the process of buying a bank-owned foreclosure is similar to a regular real estate transaction. You would get pre-approved through a mortgage lender for a certain amount. Then you would shop for homes within that price range. When you found a suitable property, you would make an offer to buy. Then you would go back to your lender for a final approval.

    The problem is your credit score. Buying a foreclosure home with bad credit is a lot harder today than it was in the past. Mortgage lenders have increased their standards for borrowers. This applies to your FICO credit score as well. You'll probably need a score of 620 or higher to qualify for a loan these days.

    [Related article: The definitive guide to bad-credit mortgage loans]

    To answer your question with any level of certainty, I would have to know exactly what your credit score. But even then, it's hard to say. Only a lender can say whether or not you meet their minimum criteria. So you might want to get pre-approved by a lender to see where you stand (here's how). This would be a logical next step, at this point.

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