The last few years have been rough on everyone. Bankruptcies, foreclosures, short sales, and unemployment have ravaged the savings and credit ratings of hard-working honest citizens, and their effects can linger. As our economy gets back to work, you may find yourself in an increasingly-common position: bad credit but good income.
Mountains of debt?
Is your credit score only hampered by past behavior, or are there current items weighing you down? If you have unpaid judgements or high revolving debt balances, you should almost always pay them down first. Doing so will increase your buying power and decrease your risk in the bank’s eyes, but it will also save you money right away. If you can hold off until you’ve paid off your most dangerous debt, do it.
How bad is “bad?”
Don’t assume you’re out of the running just because you were turned down for other kinds of loans in the past. A credit score as low as 580 can qualify for an FHA home loan if the borrower meets other criteria. If you’re below that cutoff, your options are limited, but in many cases, while a score in the 700s could take years, a few phone calls can bring you back toward 600 and get you where you need to be. If you’re not sure where you stand, your best bet is to visit a loan officer and ask their advice.
Commercial or residential?
If you’re looking to buy an investment property, don’t jump in too quickly. Rental properties are a hot commodity these days, but you might find yourself in over your heard in pretty short order. Commercial loans are riskier than residential loans, since the owner has less to lose, so you can expect to pay a very sizable down payment to receive any kind of reasonable interest rate. The numbers might still work out for you if you find the perfect deal or can do some restorations on your own, but you’ll be locking up a lot of capital in the short term. If you plan to live in your new home, banks may be willing to cut you a bit of a deal, particularly in slow markets.
Can you afford to wait?
Is the house for sale now the only home that will do? Are you being forced to move from your current home? Every market is different, and some are reheating faster than others, but unless you have a specific reason to act now, a few months of saving will usually yield better results in the long term. You’ll be able to take out a smaller loan for your target house, and you might be able to step up the house you want. Scrimping now will almost always pay off in the long run.