Learn how to purchase a home with bad credit | bankruptcy, and foreclosure in the past

Warren Oberholser
Warren Oberholser
Published on March 27, 2021

Hi, I’m Warren Oberholser. I’m a realtor in the East Bay Tri-Valley area in Northern California. My goal is to help both buyers and sellers get maximum results for one of their biggest investments, their home.

I have some important information, including how to purchase a home with little to no money down, even if you have credit issues such as bankruptcy or foreclosure in the past.

Plus, I’m going to talk about when you shouldn’t purchase, versus just rent.

First time home buyers

So you’ve been contemplating purchasing your first home, or you purchased a house in the past and you had to get rid of it due to financial issues.

But now, you’re ready to get back in. You know where you want to live. You narrowed it down to the property you want to purchase, but something’s holding you from going forward. What is it? Well, there could be a few reasons. Let’s work through it.

Low inventory has created a seller’s market

The first possible reason, a seller’s market.

For the last few years, it’s been an aggressive seller’s market, which means low inventory and buyers bidding war. This has been very stressful for the finance buyer. It isn’t uncommon for a buyer with financing to place a competitive offer thousands over asking to release all their contingencies upfront, including their loan but were beat out by a high-cash offer that could close in a week. To learn how to combat the aggressive seller’s market, please read my BOLG “Tri-Valley buyers-how to get your offer accepted“.

Down payment + closing costs can be a lot for first time buyers

Another reason, down payment plus your closing costs.

It can be difficult to save up for your down payment, especially 20%, and have additional funds for your closing costs. Many of you have other financial responsibilities like a student loan or car payments, or children to take care of including their daycare and medical needs.

Credit issues

The last possibility is credit issues.

Just a little over a decade was the biggest financial crisis of all time since the Great Depression.

Thousands of hardworking families across our nation and worldwide lost their jobs, all their savings, and their home. For many, bankruptcy relief was the only way they could stabilize their finances and allow them to start to rebuild their credit. Fortunately, I have some great news.

If you fall into the category of having difficulty saving up for your 20% or you’ve had some credit issues, I’ve got good news.

Brian LeBars from Vintage Home Loans in Pleasanton

Recently, I had the opportunity to interview mortgage consultant Brian LeBars from Vintage Home Loans in Pleasanton. Brian has been in the mortgage business for over 20 years. He has successfully handled numerous residential home loans ranging from small condos all the way to large multi-million dollar deals.

Brian is especially knowledgeable with first-time homebuyer programs and his certifications include mortgage planning and military housing specialty.

Brian will break everything down from the pre-approval process, all the way to the types of loans that are available for the first-time homebuyer.

He will also go into detail about what loans may work best if you’ve had any issues with your credit. Now there’s a lot of information on this BLOG. Towards the end, I’ll break down the scenario of whether you should rent versus buy. So without any further ado, I’m going to turn you over to Brian LeBars from Vintage Home Loans. Let’s see what the expert has to say when you need a home mortgage.

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The loan application is the first step in getting a mortgage

Brian LeBars: When I first meet with somebody, we sit down and we talk. We talk about them, their family, their goals for purchasing a property. Part of our discussion is a loan application.

The loan application is the first step of many of getting a client pre-approved.

Job history, Bank Balance and Credit score are included in the loan application

It is important to have all the details that help make up a loan application such as past job history, bank balances, and credit score.

With a first-time home buyer, after the loan application is completed, the next step is to get them pre-approved. Part of the pre-approval is determining what loan or loans the client will qualify for and will best serve their needs.

FHA, VA and 3% down conventional are most common for first time home buyers

Currently, there are three types of loans that work well for most first-time home buyers. They are FHA, VA, and 3% down conventional home loans.

FHA 3.5% down

FHA’s three and a half percent down

It’s a good first-time home buyer loan. FHA loans at three and a half percent down are more flexible for credit when compared to other loan products, such as conventional loans.

FHA is great for those with credit challenges

It is the most liberal for credit scores. In other words, someone with challenged credit has a better chance of getting pre-approved with FHA guidelines.

HFA upfront FHA MIP

Part of the FHA loan is a one-time premium of 1.75% of the loan amount. This gets financed into your loan and it’s called the FHA upfront MIP. In addition to the one-time fee, there’s also monthly mortgage insurance. Loans with less than 20% down are subject to mortgage insurance to insure the bank against default.

FHA allows co-signers

Co-signers are allowed on FHA products as well as others. This may fit your particular loan circumstance by having a co-signer. It may help you qualify for the loan that you’re applying for.

3% conventional loans are backed by Fannie Mae and Freddie Mac

3% conventional loan is a very common conventional loan product

It’s backed by Fannie Mae/Freddie Mac. It’s a great low down payment loan. It does have monthly mortgage insurance.

So a conventional loan is a loan that’s backed by Fannie Mae or Freddie Mac.

Chase, B of A, Wells Fargo all have conventional loans

So it’s a saleable product that any bank would have, like for instance, Chase, B of A, or Wells Fargo. Any one of the main banks, we all sell loans. All loans go to the same place.

3% down conventional mortgage, has no ‘funding fee’

3% down conventional loan, there’s no funding fee like FHA. Cost structure’s better when compared to FHA.

3% conventional, no upfront insurance needed (it does require PMI or mortgage insurance)

No upfront insurance is needed, but rather PMI or monthly mortgage insurance. This can have advantages because it’s priced by your credit score and you could be rewarded with a lesser monthly cost.

3% conventional mortgage allows the mortgage insurance to be removed

The big difference with conventional loans versus three and a half percent down FHA, the mortgage insurance has the ability to be removed.

Conventional loans tend to be more flexible for condo purchases

Another benefit of conventional loans, they tend to be more flexible when purchasing a condo.

Bankruptcy: For conventional loans, you can be eligible after being out 4 years for Chapter 7 & 2 years for Chapter 13

In regards to bankruptcy:

If you have a history of bankruptcy, to be eligible for a conventional loan, you must be out of Chapter Seven for four years and Chapter 13 for two years.

Post-foreclosure:

Regarding foreclosure, you could be eligible to purchase with a conventional loan after seven years.

VA loans

VA’s one of the best first-time home buyer loans & no down payment loans

It’s 100% financing offered to retired military service personnel. It’s one of the first ones we look at. Generally, when I first talk to a client, I’ll ask them if they’ve served the country or they’re a vet.

Veterans must be DD-214 eligible to receive VA loan benefits

If they’re VA eligible, they’ll get issued their DD-214. They’ll know if they’re eligible for a VA loan, but it’s something that we always ask because that’s one of the first products we look at.

Veterans VA Benefits

Here is a summary of the VA benefits:

  • No money down
  • No monthly mortgage insurance
  • No reserves required
  • The seller can pay closing costs plus 4% concessions
  • 100% gift allowed for a down payment

A veteran can now pay for the termite inspection that is required by the lender. So when you compare that to FHA or conventional, that’s always one of the first options you look at.

We honor and thank our Veterans
My brother Larry (on the bottom) and dad!

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Brian LeBars

For any specific questions for Brian, please reach out to him directly.

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Advantages with home ownership

So as promised, I’m now going to discuss rent versus buy

Before I begin, I do need to point out I’m a realtor, not a loan specialist like Brian. I’m also not a financial planner, CPA, or attorney. Therefore, I cannot give any financial advice or recommendations. I do recommend you consult with your financial expert. This way, they can advise you on the best solution that fits your financial needs.

The loan example I’m going to discuss is for a property purchase of $600,000. We’re going to use an FHA loan, so the down payment is 3.5%. Total points and closing costs are $6,000. With the upfront mortgage insurance of 1.75, this brings the mortgage balance to $589,133. Just a little review, as Brian discussed, the upfront 1.75 MIP fee is factored into your loan balance.

So with:

  • 579,000
  • Plus the $10,876
  • That will come out to $589,133

The monthly breakdown for owning is principal and interest payment, $2,855.23. Mortgage insurance, $417.30. Property taxes, $625. Property insurance, $80. Total monthly payment, $3,978.

Owning vs renting

To compare owning to renting, let’s say the house comparable to the one that you are purchasing would rent for 3,000 a month. This equals a difference of $978 more per month when owned, or does it?

Home mortgage and property taxes can be tax deductible

You see, the mortgage interest, property taxes, and mortgage insurance can be tax-deductible.

First year of tax amortization

If we look at the first year of a tax amortization schedule for a 30-year fixed mortgage of 589,000,

approximately 24,000 can be written off against your income.

Now, there are limits on how much you can write off. And again, these numbers I am going over with you are for example purposes only. So you can now see there are some tax advantages of homeownership.Of course, as I stated earlier, I do recommend you consult with your tax professional so they can best advise on how much the tax savings will impact your monthly expenses.

The next subject I want to discuss is home value appreciation.

If you compare your rate of investment on a home’s appreciation over 10 years, let’s say it appreciates at a rate of 3.4% and compare that to your rate of investment on your down payment with closing costs at 3.4%. If you chose to invest that conservatively in the stock market, $600,000 over 10 years at 3.4% equals $840,000.

This comes out to a $240,000 appreciation gain. Compare that to $27,000 over 10 years at 3.4% equals $37,800. This comes out to 10,800 appreciation gain.

You can see you’re much further ahead with your home appreciation. Again, this is just an example, not a prediction. And of course, not a guarantee on your return.

Advantages with renting

The last subject I’d like to discuss is when renting a home can have advantages over homeownership.

If you’re not planning to stay in your home for more than two to three years, it may be better to just rent.

It may be a better investment to rent if you plan to move less than 2 years

The reason being, your home selling costs, which are usually 6% realtor fees and closing costs could outweigh the home’s appreciation rate. It may be a better solution to put your down payment and closing costs in the stock market.

Again, to best understand this, you’ll need to sit down with the appropriate professional to assess the right solution for your needs.

I hope you enjoyed this article. Please let me know if you have any questions. Warren

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Hello…I work with both buyers and sellers in the Tri-Valley area of Northern California. The Tri-Valley is comprised of 6 cities: Pleasanton, Livermore, Dublin, San Ramon, Danville, and Alamo. To better understand what each city has to offer, I have created a Pros and Cons video and BLOG for each – (Pros & Cons for Pleasanton, Pros & Cons for Livermore, Pros & Cons for Dublin, Pros & Cons for San Ramon, Pros & Cons for Danville and Pros & Cons for Alamo). If you are thinking about purchasing or selling a home, please reach out to me by text, phone, or email. If it is convenient, I can schedule a Zoom chat so we can discuss your home goals. Wishing you all the best on your home journey. Cheers!

Warren Oberholser

🏡Home buyers guide 🏡

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Warren Oberholser

eXp Realty

[email protected]

(925) 980-4603

DRE # 01861944

ALL MATERIAL PRESENTED HEREIN IS INTENDED FOR INFORMATIONAL PURPOSES ONLY. THE INFORMATION CONTAINED HEREIN HAS BEEN OBTAINED THROUGH SOURCES DEEMED RELIABLE BUT CANNOT BE GUARANTEED AS TO ITS ACCURACY. SUBJECT MATERIAL MAY HAVE ERRORS, OMISSIONS, CHANGES OR WITHDRAWAL WITHOUT NOTICE. ANY INFORMATION OF SPECIAL INTEREST SHOULD BE OBTAINED THROUGH INDEPENDENT VERIFICATION.

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