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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.

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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.

Edit:
There are different aspects of risk that the bank factors.

  1. Whether someone will default on repayments. This is established by income and credit score. Based on this they would assign low, moderate, high risk.
  2. 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%.
  • Ok, Thank you, that clears things up but could the down payment be used as collateral if both parties agree? – Lowbrow Sep 26 '16 at 14:00
  • "Bank cannot take more than what they are owed." They will take more to pay for their costs of repossession and sale, as well as accumulated interest. – Tor Klingberg Sep 26 '16 at 14:20
  • @TorKlingberg the bank are owed that money as charges for not complying with the terms of the mortgage so they are not taking any more than they are owed in the same way that getting more money than they lent due to interest isn't taking more than owed. – MD-Tech Sep 27 '16 at 12:43
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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.

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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.

  • Ok, can you still get a tax exemption on an equity loan? – Lowbrow Sep 26 '16 at 2:24
  • Here's a good article to answer your questions on that: foxbusiness.com/features/2014/03/06/… – Daniel Anderson Sep 26 '16 at 3:36
  • Wanna bet? You could be faced with the Ben Bernake problem, where you have plenty of money in investments, even a decent self-employment income, but can't get a mortgage because you don't have W-2 income. – jamesqf Sep 26 '16 at 20:09
  • Believe it or not, no-doc loans still exist, so you can find a mortgage that doesn't require proof of income. They're not as prevalent as they were prior to the crash in 2008, but it's troubling that there's a resurgence of that type of lending again. Who says we learn our lessons? (chuckle) – Daniel Anderson Sep 26 '16 at 22:59
  • @Daniel Anderson: I'd be interested in knowing where to find such a mortage. I've been trying to refinance (for low interest rate) for a while. Have about 30% LTV, credit score around 800, enough in investments to cover the mortgage amount several times over... But no W2 income. – jamesqf Sep 27 '16 at 5:38
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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.

  • The problem is, reaching someone who can override the bank's usual policies may be difficult. You might succeed at small lical banks, or credit unions, which are more willing to consider unusual cases. – keshlam Sep 25 '16 at 22:29

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