How to Buy a Home With Bad Credit and Foreclosure

If you have bad credit and a foreclosure on your credit history, purchasing a new home can be difficult. A foreclosure will stay on your credit report for seven years, and can lower your score by as much as 280 points when factoring in late payments prior to the actual foreclosure. However, it is not impossible to purchase a house and there are many programs available to home buyers in this situation.

Step 1

Apply for a federal loan program. There are two main federal home loan programs, Freddie Mac and Fannie Mae. If you have had a foreclosure in the past, you will need to let four years elapse before you can qualify for one of these loans. Freddie Mac offers a program called Home Possible that is designed for those with bad credit. The loan program offers a fixed interest rate and assistance with closing costs. Fannie Mae works by guaranteeing loans with participating banks. Once again, they offer low fixed interest rates as well as some assistance with closing costs. You will need to first find a Fannie Mae approved lender before applying for this program.

Step 2

Apply for an FHA loan. The Department of Housing and Urban Development offers loans through the FHA or Federal Housing Authority. These loans cover 96.5 percent of the cost of a mortgage, making them ideal for those who do not have the money for a large down payment. Income restrictions vary by your county of residence and there may be limitations on the price of the home you can qualify for based on where you reside. These loans are fixed rate as well and the program is available to those with low credit scores.

Step 3

Apply for a U.S. Department of Agriculture loan. If you are looking for property in a small town or a rural area, it may qualify for USDA financing. Very low credit scores are accepted under this program and the financing available is 100 percent. Income restrictions and loan amounts will vary by county. This program is intended to help rural development and to encourage population growth in small towns.

Step 4

Find a house with seller financing. Many sellers are willing to offer financing to buyers. Typically, they will not run a credit check, relying instead on good faith money and their overall impression of a buyer. You will need to have a larger down payment for this type of financing, but often a seller may be willing to work with you. If you do get this type of financing, you will need to purchase mortgage insurance to help secure your investment and the loan.