In the US, If you want to put $400,000 down and borrow $100,000 with a mortgage to buy a $500,000 home, is it really so important to have good credit with so much collateral? If you were to default the bank will get all that equity so it seems to my uninformed mind that banks might desire you to have bad credit in such a situation as above were %80 of the house is already put down.
is it really so important to have good credit with so much collateral
Yes it is important to have good credit, the bank may not lend or may charge higher for bad credit.
If you were to default the bank will get all that equity so
You are missing the fundamental. Bank cannot take more than what they are owed. When they take possession of house, they auction it. Take what was due from the sale and return any surplus to the owner. This entire process takes time and hence bank wants to avoid giving loan to someone who they feel is risky.
There are different aspects of risk that the bank factors.
- Whether someone will default on repayments. This is established by income and credit score. Based on this they would assign low, moderate, high risk.
- In case of a default, will the Bank lose money. This is determined by the equity in the house. The more equity, the more the Bank is safeguarded that even in adverse conditions, the Bank will not lose money. The only advantage with your example is the bank may not lose money even if price crashes by more than 50%.
Used car dealers will sometimes deliberately issue high-interest-rate subprime loans to folks who have poor credit.
But taking that kind of risk on a mortgage, when you aren't also taking profit out of the sale, really isn't of interest to anyone who cares about making a profit. There might be a nonprofit our there which does so, but I don't know of one.
Fix your credit before trying to borrow.
If you put down 80% of the purchase price for a house, you can very likely get a loan with few problems. After all, people with credit scores in the mid-500 range can get loans with 20% down.
My question would be this -- if you actually had $400,000 then why not just buy a $400,000 house? If the goal is to improve your credit then if you buy a house for cash, you can then take out a home equity loan and make the payments, which would greatly improve your credit.
In this example you are providing 4x more collateral than you are borrowing. Credit score shouldn't matter, regardless of how risky a borrower you are. Sure it costs time and money to go to auction, but this can be factored into your interest rate / fees. I don't see how the bank can lose.