Home buying secrets revealed: Buy a Home without Good Credit or a Down Payment
There are many sources to which people turn when they are interested in buying a home. Real estate agents, financial institutions such as banks and attorneys are always being approached with questions by would-be buyers. The problem with using these outlets as your primary source of information is that, no matter how sociable they seem, they are not your friends.
These men and women are at work. While they may be kind and decent individuals, they are paid to accomplish certain goals. A traditional system of “rules” has developed to help these professionals (especially agents and banks) steer you into making decisions that will earn them money, regardless of whether or not they benefit you. These rules state that you must:
– Qualify for, and use, multi-year financing
– Have a high credit score
– Present an unbroken, two-year employment history
– Make a sizable, upfront down payment
Now, if you’re a highly qualified borrower, with a lump sum of cash, a great job, and awesome credit, none of this presents a problem. You’re already in the traditional lender’s club and purchasing a home is easy. If you’re not, you may believe you’re out of luck. Fortunately, despite what everyone is telling you, you don’t have to play by their rules. And it’s a good thing, too, because they may not have your best interest at heart.
Your real estate agent’s motivation
Put simply, your agent’s motivation is 6%. That’s the average commission rate for a regular, real estate agent that you’re likely to find in the local area. He pulls his 6% right off the top of the selling price, but what does that mean for you?
Depending on your location, you can probably get a suitable home from anywhere between $100,000 and $200,000. Assuming your future home lands right in the middle, your agent is going to be expecting his $9,000 (plus closing costs) on the day the deal closes. When you can produce that much cash up front, your agent will kill the deal.
Some egotistical agents will shut down a deal even if you do have the required commission costs included in your down payment. Instead of acting as an intermediary, some agents will act as if they are representing the property itself, denying potential buyers whom they deem to be unworthy, based on credit or some other arbitrary measure.
Even humble agents rarely work with you to figure out another way to put you into a new home. When you can’t afford the commission, your only advice is this: keep saving.
The trouble with traditional lenders
When it comes to money, language gets complicated and confusing. There are so many principles, evaluators and indices that it’s a miracle anyone understands how to borrow and lend at all. There is a wide array of lenders that make things more difficult. Each has its own requirements and many are niche lenders, focusing on a particular market. Only about 1-in10 potential borrowers are actually qualified to borrow from a standard lender at a decent rate.
Credit is the determining factor in evaluating most mortgage loan applicants. For many banks that offer mortgage lending, the decision whether or not to lend you money rarely makes it past the first round. You see, no matter what your credit score is, it falls into a specific category and many banks grade like teachers. The grading scale for credit evaluations is typically A, A-, B, C and D. Most of the time, if you’re not an “A” or “A-” applicant, you don’t qualify. Period.
What makes things worse is that a bank’s loan officer rarely knows anything valuable about where to send you if you don’t qualify. There are so many different lenders available that an officer couldn’t keep it all straight if she tried.
To get qualified for a mortgage without astonishing credit, you’ll really need to explore your options. With or without the help of a broker, you may begin exploring the programs that different lenders use to approve their borrowers. If you stumble across a great and honest broker with a lot of contacts, he or she may be able to find a program that fits you like a glove. More likely than not, however, a broker will behave just like a real estate agent. The focus will be entirely on the upcoming commission and finding you the best rate or the most applicable lender won’t be the primary focus.
Lots of brokers, despite their claims of being able to offer you variety, focus on lenders that approve applicants in a particular niche. If you fall outside of that niche, you may not get the help you’re looking for.
When you go shopping for a lender that will 1) approve you, and 2) approve you at a reasonable rate, you might experience rejections. In a confusing and intricate market, it can be hard finding the right place to look.
Seeking advice from your attorney
The problem with seeking real estate advice from your attorney is simple. Unless they are real estate lawyers specifically, they’re highly unlikely to have the knowledge that will help you. Truthfully, most attorneys know very little about real estate and mortgage lending.
What you’ll probably find is that your attorney regurgitates much of the same advice you’ve heard from your bank’s loan officer and the real estate agent who both tried to mash you into a borrower’s mold that you just don’t fit. “Pay down your debts. Keep an eye on your credit score. Save for a down payment.” Those old maxims aren’t going to help, and they’re all you’re going to get from your estate or divorce attorney.
Unfortunately, the advice you get from the family attorney could be even less helpful than the stuff you’ve already heard. In fact, it could be harmful. The thing about attorneys is that, because society gives them so much praise, many are very egotistical. People regularly go to them expecting to get sound advice on any number of subjects. After a while, most will decide to start giving it.
Just as a parent makes up answers that sound reasonable when a child won’t stop asking “why,” an attorney will start peddling out advice that sounds plausible, regardless of whether there’s any truth in it.
When standard avenues of financing don’t exist for your situation, an attorney willing to explore creative alternatives can be worth his or her weight in gold. Realize, however, that only an attorney who specializes in real estate contract law will have enough of a grasp to advise you wisely on these concerns. Also recognize that the advice you get could cost you a commission.
The buyer’s myth
Homespun wisdom about buying a house is always the same: it’s better to buy than to rent. This tenet ignores a whole other option. It is often better to manage than to buy.
Have you ever wondered why the wealthy elite have influence over so many companies and organizations but own so few of them? They expend a lot of energy ensuring that the names of trusts and corporations claim ownership, even if they, as individuals, are in charge.
The benefit is that they get all the benefits of ownership – they have input on design, create marketing strategies and influence the culture of the organization – without much of the risk. You can do the same thing with your home.
With an option to buy
There is a housing option that could leave you feeling like the rich and powerful. If you know how to use it, you can live in a home and have total control over it. Paint it how you want, decorate it how you want, occupy it how you want – but don’t acquire the burden of ownership. All of the official papers, including the mortgage, are filed in the landlord’s name.
Leasing a home with the option to buy means, in essence, that you borrow the home for a predetermined length of time. As part of the agreement, you are locked in to a short lease, usually 1-5 years. When that lease ends you’ll be given the right to buy it from its current owner. If you don’t want it, you aren’t required to purchase it. The choice is yours.
Advantages of leasing with an option to purchase
When you lease with a buying option, the benefits are manifold. Some are financial, but others are simply practical. On the money side of things, you can get into a new home without qualifying for financing through a bank or other lender. Usually, there are few (if any) upfront costs such as a down payment. That’s because the agreement treats you primarily like a renter. A good negotiator can even convince the landlord to begin applying a monthly rent credit towards a future down payment, to ease the transition from leasing to owning.
The best financial advantage of leasing with a purchase option, however, is that the price of the property is agreed upon at the start of the lease. What that means is that the potential buyer enjoys a multi-year window of reflection upon the housing market. When you sign a lease agreement with an option to buy in 2015, the house may be worth $200,000. In 2018, when the lease ends, the house may be worth $250,000! You only have to pay $200,000, however, because of the terms of the agreement made in 2015. Just like that, you can earn $50,000 in equity.
That perk works the other way too. You can get away from properties that are decreasing in value without signing up for a huge mortgage first. In this manner, potentially large losses can be avoided.
Practical benefits are also important. You can’t learn much about a place until you spend a little time there. A lease allows you to determine whether the neighbors are jerks, if the schools are safe, and how disturbing the nearby firehouse can really be. By the time you have to make a decision about buying, you’ll know the neighborhood (and your home) inside and out.
Wondering why your agent never shared this tip?
As we’ve already discussed, your agent – even your really nice, sweet agent – sells houses to make his or her living. The primary motivation of a real estate agent usually isn’t finding out what’s best for you. It is collecting commissions. And a real estate agent who gets you into a lease-to-own property doesn’t get a dime.
Finding the deal
Don’t think that property owners won’t recognize the inherent benefits you’ll receive by drawing up a lease agreement that leaves you with an option. They’ll know as well as you will that you could make huge equity gains. Why, you may be asking, would they agree to such a deal at all?
Well, there are lots of reasons that I property owner would be looking to unload a property in such a way. One of the top benefits is that the arrangement can be made quickly. Individuals with a lot of debt, overwhelming bills, or a reason to start saving may be willing to potentially give up a little bit of their advantage in exchange for immediate cash flow.
They may also be in a similar position as you. Perhaps they don’t have a big wad of cash sitting around, so they can’t pay a real estate agent several thousand dollars in commission to sell the house. Not everyone will agree to lease you a home with an option to buy, but when you do find someone you can rest assured that you’re helping them as much as they’re helping you.
Penning the agreement
Before you ever move in, you and the property owner will have to create an agreement that is satisfactory for both of you. It is absolutely vital that you read and understand this document. If you can have a hand in writing the contract, you’ll be even better off.
It’s important to protect your interests when you sign a contract. When it’s possible to create opportunities to save or earn money, try and incorporate those as well. Here are a few things you can try to include to ensure that the agreement benefits you:
– Apply a monthly credit towards a down payment
– A long lease term (it will give you more time to monitor the market before buying)
– The right to lease out the property yourself (in case the property value skyrockets; you could earn profit by charging more than the property owner charges you)
– Clear, obvious phrasing that states the terms of the deal, including your option to buy, and for how much
You should be sure you understand the ins and outs of your agreement long before you sign it. Feel free to bring in a professional to help you decipher the language and intent of the agreement. Times like this are appropriately suited for an attorney.
Another way to get in for cheap
If purchasing a home without a down payment and with bad credit is still your goal, you can’t overlook the option of buying on contract. These arrangements can be made in one of two ways: you get the deed or the seller holds the deed. The manner by which the financing is wrapped differs by state, so it’s important to get your facts straight before getting into a deal like this one. Consult an expert or become one yourself by referencing lots of books, articles and websites about home ownership, purchasing and contracts.
To state the matter simply, the contract allows you to control the home much like the lease-to-purchase option detailed above. You’ll have all the same benefits. The financing, however, usually stays in the name of the seller. Clearly, this is wonderful for a bad credit buyer, because you won’t need to qualify for financing. We already know what a nightmare that can be, so if you can avoid it, you may be best off doing so.
Determine why, not what
In order to find a seller who is willing to maintain the liability of the financing, you can’t go house shopping in the same way that you would go shoe shopping. It doesn’t work to simply ask “how many bedrooms?” The real question to which you need to find an answer is “why?”
Once you can determine the reason that a seller is letting go of his or her property, you can assess whether a buy on contract agreement is even beneficial to them. A traditional seller who is moving or is cashing in on an investment will not be willing to hold onto any existing financing. They’re trying to move past all of that. Someone who needs to pay for medical bills, or settle a divorce or any number of other things would be more willing to keep the financing as long as cash starts coming in.
Also, the who
Tracking down sellers who fit your ideal mold – people who need to quickly get cash, won’t require a down payment and don’t mind your bad credit – can be difficult. You won’t necessarily just bump into them on the street.
You should start looking at housing listings in the newspaper and on the internet. As you pore over them, keep your eye out for the following phrases:
– “Motivated seller”
– “For sale by owner”
– “Must sell”
Whenever a property is being sold by someone who feels compelled to add any of the aforementioned phrases, you must wonder why. There’s a very traditional and established method of selling homes (remember? It’s the one that’s shutting you out). Why aren’t they utilizing it?
Typically the reason is personal or financial, but most times you won’t find out specifically. A property owner probably doesn’t want to reveal to you what’s going on in their personal lives just because you want to buy a house without credit. You’ll probably have to be subtle about your inquiries. A gut feeling is likely as good as you’ll get, but if the property suits you, then such a seller may be interested in letting you buy on contract.
Another section of the newspaper worth examining for buy on contract deals is actually the “Real Estate Wanted” section. The men and women who buy and sell houses often find themselves in positions where they just need to improve their cash flow situation. The whole secret to profitably buying and selling homes is to have payments coming in regularly. They may have a property they need to dump quickly. In order to do so, they could offer you a good buy on contract deal.
The last way to find a bargain
If you’re looking to find a nice home for purchase, but are having trouble finding someone who will sell to you without financing or good credit, you may just have to let the sellers know where to look.
The classified section of the newspaper works both ways. It’s cheap and easy to put up an ad that states your exact situation. “Mother of two looking for lease with eventual option to purchase” is a perfectly legitimate listing. Include a neighborhood preference, if you have one, and the monthly or overall total you’re willing to pay. A seller might just give you a ring.
A few tips
If you find yourself able to enter an agreement like those listed above, congratulations! Now it’s important to hold up your end of the deal. Make your payments on time. Treat the property owner with respect. It’s true that you’re paying him or her every month, but you’re benefitting too!
When dealing with an escrow company, on-time payments are a big deal. Make them regularly and you could see 1) an increase to your measly credit score, and 2) the acquisition of a mortgage rating (which makes you even more creditworthy).
Don’t ignore the local housing market. Once you’ve entered a lease agreement with an option to buy, most of the decision regarding whether or not to execute your right and go through with the purchase should be made by the market. It’s rarely a good idea to buy if the house is now worth less than it was at the time the agreement was signed. On the other hand, if the value goes up, you’d be turning down free equity by walking away.
Own your own home
Forget what you heard about credit and financing. Owning a home can be as simple as doing a little bit of research and paying the bills. Continue to read about the process and become as educated as possible. Before you know it, you could be placing a “Welcome” mat on the doorstep of your very own home!