Should You Buy a House with Bad Credit?

Interest rates are still low even though home prices have increased.  Still, homes are still very affordable.  Does that mean you should buy a house no matter what?  What if your credit is down the drain?   Should you buy a house with cloudy credit? I don’t think so. And I’ll illustrate why by sharing an e-mail I received from Pilgrim Patty not long ago:

I am hoping to buy a home in a different state. My current mortgage is just about paid off. My kids and I need to get away from the problems here.

My credit is fair but I need to know if I stand even a chance of getting another mortgage in a different state with fair credit.

Patty went on  in her e-mail to tell me that she’s been working hard to repair her credit scores in order to buy the house. She sounds like a good person trying to do right by her kids.  I feel it.

What is the best course of action?

She has a number of options. They vary in degree of risk. Let’s first clarify her priorities:

First and foremost, Patty needs to get out of Dodge pronto. If the environment she’s in is toxic to herself and her children, she’s got to get out regardless of the financial consequences.

The least risky move would be to sell her home now. Then, she could move and get settled in her new home. In order to keep risk low, she should rent – not buy now. Even though prices are low, she’s moving to an area she may not be familiar with. She might not like it. Keep the options open. Rent first when you move to a new area. That’s my motto.

So the least risk option would be to look for a mover – not a mortgage right now.  I know these low rates won’t be around forever.  But that’s not a good reason to jump into a mortgage she can’t afford.  And if she’s got poor credit, there is a good chance she’s living  beyond her means.  Now is the time for Patty to batten down the hatches rather than head out to rough waters.  “Verdad?”

Next up the risk scale would be to rent her home out and rent another place in the new town. She should do this only if she can’t sell because of market conditions.   But she takes risk if she goes this route.  If the renter splits, she’s still on the hook for the mortgage on her home and the rent in her new town. I would suggest she take this course of action only if she can’t sell.

If Patty insists on buying a new place now, it’s even more important to sell her existing property. If that is not possible, Patty must rent the existing property out and refinance it in order to have the down payment for her new home. Getting a mortgage with bad credit is difficult…but not impossible.

Still, I really don’t like this idea at all. It exposes her to too much risk. She might not like her new place. The renter might trash her existing property and/or not pay rent. Her new job might not work out. Too many risk factors.

Time is on her side. Her existing property is almost paid off. Also, she’s taken important steps to repair her credit. Move and get established in a nice place that is good for your kids, Patty. Rent for a while. The worst that will happen is that she’ll have even more equity in her existing home and her credit will improve even more by the time she’s settled in and ready to buy again.  What’s wrong with that?  Nothing.

The better her credit and the lower her risk, the lower her mortgage interest will be. If none of this advice works, the last resort would be for Patty to pick up a phone and start calling mortgage lenders. Talk to as many as possible. Get quotes. Then, make sure to weigh the risk factors (new job, new town, having renters) before taking action.

What advice would you give Patty?