Q: Can I buy a home with bad credit?

A: You can always buy a home, no matter what your credit score is... The issue is whether or not you can get financing.

When you have bad credit, you (theoretically) pose a greater risk to lenders. They are worried you won't pay back your loan, in which case, they will have to seize your property and kick you out. In this way, home loans are secured loans -- they are secured by the underlying property (your house). This is why home loans have lower interest rates than unsecured loans -- home loans are less risky because the lender can always repossess the underlying property to recover his money. However, to do this is not free: It is a big and costly legal hassle, and since there is a limited amount of money that each bank can loan, they would prefer to lend it to safer borrowers with higher credit scores.

Of course, an appreciating (rising) housing market makes it much easier for people with bad credit to get home loans. From 2002 to 2005, housing prices were soaring throughout most of the country, and interest rates were low. Banks didn't mind lending to people with bad credit, since if the borrower was unable to pay, the bank could simply repossess the house -- which would have gone up in value by then enough to make it worth the bank's while. But now the housing market has taken a turn for the worse, and thus, banks are being much stricter with their lending. This is the "subprime crisis" you hear so much about on the news.

It's not nearly as easy to get a bad-credit (subprime) home loan today as it was even a year or eighteen months ago, but it's not impossible. One thing you can do to make yourself more credit-worthy is to have a substantial down payment for your home. This lessens the bank's risk. A second option for home-buying is to sidestep the mortgage lender altogether and work with the home-seller for "seller financing" of the property. As mortgage lending gets even tighter, more and more sellers will be willing to finance their properties themselves.

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