Can't Qualify for a Mortgage? Now What?

There are many reasons more than half of Americans can't qualify for a mortgage. It could be insufficient credit history, low credit score, self-employment where income is difficult to document, or it could be that you had good credit and used it and now have too many outstanding accounts. It could be that all these things are fine but you just don't have a down payment.

Over time, most of these things can be cleared up. However, today we are not looking at credit repair and saving plans. These are fine and I'm not going to discourage anyone from working through these situations or following the Dave Ramsey plan to pay off debt.

What Are Your Options Today?

Instead of looking at what you can't do, we are going to look at some of the things you can do. I like to consider what Winston Churchill told us, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.“ Right now, if you are reading this the difficulty may be the low credit score, or down payment cash. Whatever it is, it is an opportunity to go down a path other than the one that runs through your friendly local bankster and the financial colonoscopy the underwriter will put you through. You may be reading this because have been down that road already.

Most people in this situation fall into one of two categories. Either you have no down payment or no proof of financial responsibility. If you have neither, it could be a little more difficult.

Got No Money

If the down payment is an issue there a few choices. If you are someone who has helped defend our country, the VA has a zero-down option that can get you into a home of your own. If your tastes aren't too extravagant, an FHA insured loan will let you come in with 3% down.

If you qualify as a low-income buyer, particularly with children, your state, county or municipality may be able to help. These programs vary with locality and terms change from time to time. Among the features of some of these programs is after you stay in the property a certain length of time, five years, for instance, the amount you owe begins to go away. Some programs have a certain amount of funds allocated and when they are used up, the funding stops until more is available. Your real estate agent should be able to point you in the direction to apply for these programs. If they give you a blank stare when you ask about these things, find another agent.

Have Some Cash But Can't Get Past the Credit Check

Loans are approved by the bank's underwriters. These are the trolls that work in the basement of the palatial edifice called the home office. They may not really be trolls, but I can't say for sure as I have never met one face to face, but have seen the result of their work. Underwriters are usually not very imaginative people. They have their lending criteria and are loathe to deviate from it. They are looking to protect the lenders' interest and if you can't prove that there is a good chance they will get their money back, they will scream, “Nyet!” (if they are Russian).

Large Down Payment Plan

You may find the underwriter more agreeable if you can put down a larger than average amount of money – like 30, 40, or even 50 percent. By giving a larger down payment, the loan-to-value (LTV) drops significantly and there is a greater chance of the bank recovering their investment should you fail to pay and they have to give you the boot.

Not So Large Down Payment Plan

Here is where we usually get off the beaten path that runs through you friendly local bankster. So you can't put 50% down? Most people can't. If you have some down payment, you may still be able to work out a deal for your own home.

Many investors are willing to let you in their houses with a lease option agreement. Some investors are actively seeking out people looking for this kind of buyer. With this arrangement, you usually give a non-refundable down payment. Keywords are non-refundable, so don't be surprised when you see that in the agreement and don't be surprised if you don't get your money back if you bail on the agreement. There may or may not be a portion of each month's rent applied to the final purchase. The term is usually a couple of years to give you time to get your credit score high enough to satisfy a persnickety underwriter.

Some homeowners who don't need the funds from selling their property to buy the new home may be open to this type of arrangement, particularly if they are going to put the money in an underperforming CD or savings account. Most only want to see cash, but sometimes the smart ones will entertain such an offer. You generally won't see this done through an agent as there usually isn't room for a commission and it just doesn't align with their thought processes. You will probably have better luck working with For Sale By Owners (FSBO). You just have to keep asking..

Some owners will actually take back the mortgage so you don't have to make your plea to the friendly neighborhood bankster. They may not go for a full thirty years, One thing to be careful of is sometimes you will be offered a short term with a balloon payment at the end of something like five years. This has been made illegal for owner-occupied housing some years ago by Messrs. Dodd & Frank.

For the Investor

A balloon mortgage is perfectly legitimate for an investment property. You may use it if you don't intend to hold the place long term, or if you are fixing it up and can refinance when you increase the value. This will put you in the world of the private lender.

Private lenders are much easier to deal with than banks. They don't look at every detail of your last three years' tax returns. They look at your track record and the security for the loan. Often you can get the money in a week. Just show that you can get the job done.

There are average people who have money in their IRA and are happy with six to eight percent. Twelve is not unreasonable in a pinch. Money is usually loaned for twelve months, often with short extensions available, so this is primarily a construction loan for a rehab. There are also sharks in the business as well. At an investor's breakfast I sat across the table from a guy who offered money at fifteen percent with five points. I said I would keep that in mind – and promptly forgot about that offer.

Many Options

If you thought you could only get money from a bank to buy a house, there are several alternatives if you put forth the effort to pursue them. We've shown there are various ways to buy real estate. Sometimes you just have to look around a little, be flexible, and persistent. The money and deals are out there.

When is a Bargain Not Such a Good Deal?

I recently read an article touting several large cities as great places for housing bargain hunters. While fewer homes are on the market in each of these areas, the ones that are left are going at reduced prices below pre-pandemic levels. The reasoning was that those who didn't really need to sell at the moment had pulled their properties from the market to wait for the economy to open up more and yield a higher price. Those houses left on the market had prices lowered and owners willing to bargain – up to a point.

Still another article claimed now was a great time for millennials to get a place in pretty much the same cities for much the same reasons. I guess the reasoning was many millennials like city life with everything within a few blocks walking distance. They may be right and millennials may be the ones to bail out current city dwellers looking to leave the urban environment.

Not Just the Health Scare

On the surface this seems to be a logical assumption. However, when you look more closely at cities like Los Angeles, Chicago, New York, and many others, there has been a steady outflow of residents looking to escape rising taxes, crime rates, and a host of other problems associated with modern high-density urban living. The truth is yes, you can buy for a lower price, but – and it's a big but – it is quite probable that you will not see as much appreciation of your investment as you get with other properties unless these cities can resolve the issues that led to lower prices and urban flight in the first place.

When you buy a house, you buy more than a house. You buy a neighborhood. You buy a local and state government. You buy a culture. Some of this is easily forgotten when you are dazzled by granite countertops and shiny chrome and glass bathrooms. The whole picture needs to be considered.

Not Just the Big Cities

Just because you find a “bargain” in a more hospitable municipality, it doesn't mean you don't have to look at the whole package. Not far from me there is a neighborhood that was built up with small two-bedroom bungalows sometime in the late '40s into the '50s. About fifteen years ago a builder found some vacant lots in the area. I don't know if they had been vacant all along or if he bought some decrepit houses and knocked them down.

They built about half a dozen homes in the then-current style with features no one in the neighborhood even thought of, like garages, more bedrooms, multiple bathrooms, nicer kitchens, and the like. I'm sure they sold for much more than the neighboring properties did at the time and the buyers still thought they were getting a good deal. However, today, if one were to be sold, it's doubtful they could get a price anywhere near the price when the house was new and they are living in a house that is in roughly the same condition of the less-than-perfect neighborhood.

Had the original buyers purchased a similar home something like ten blocks to the east, they would have paid a little more at the time, but today would have a property worth eighty to one hundred thousand dollars more. Did they really get a bargain?

Watch the Other End As Well

Just as you can get burned by just looking at a low price, you can over improve a house beyond what you could even think of selling it for. This doesn't mean you don't make things nice, but you do it for yourself and shouldn't expect a financial reward.

I ran into an example of this when remodeling our current home. We were looking for tile for the master bath shower surround. My wife saw this really nice imported tile that cost around three times as much as the stuff from American Olean. When we sell the place, it is doubtful that we will get one penny more because of the fancy tile – but it was for us and made her happy and kept me from sleeping in the living room..

The same thing happened when we picked out the range for the kitchen. Most double oven stoves have one unit large for things like turkeys and a smaller one for things like cookies and pies. She wanted the one where both units were the same size and you could put a turkey in either one. The thing cost twice as much as the normally configure ranges, but we have used it often and appreciate the capability, even though it is also doubtful any potential buyer would know or care about the difference. So, do we roast two turkeys at a time? No, we don't make two turkeys at once – but it's good to know we can in case the situation arises.

Why Do You Buy a House?

The question comes down to why you buy the house in the first place. If it is an investment, then you have to be particularly careful about the long term valuation. If it is a place you really want to live in, then some of the financial considerations are secondary beyond the question of can you afford the home.

If you are planning to be there for a long time, the short term fluctuations are not a major consideration. If you consider yourself an upwardly mobile young executive with a major corporation you may not have much time in any one place so buying a house where you could lose your Luigi Borrelli shirt may not be a good idea. I have a friend who worked for IBM – and he told me that contrary to common perception, those letters stood for I Been Moved.

The Choice is Yours

What you buy, or the decision to buy rather than rent is not a simple one. You know what you want and can afford, but don't let price be the sole factor. Look at the big picture around the property. Then, you might want to think about what Will Rogers once said, “Don’t wait to buy real estate. Buy real estate and wait.” Just put yourself in the best position to benefit from the choice.

Seven Magic Words to a Better Price

Many years ago I attended a conference held by one of the masters of the real estate industry, Ron LeGrand. There is very little this guy hasn't done in the business and very little he doesn't know. I picked up quite a few bits of information that week, but one, in particular, has stuck with me over the years, and I've used quite often to my benefit.

High and Low Anchors

When you look to buy a property you will, many times, run into a high anchor. A high anchor is a price a seller knows is more than a property is worth. They do this with the idea of coming down some to give the buyer an impression that they got a good deal and also to discourage all but the most confident from coming in with a low-ball offer. It is a negotiators mental game. They take you from what you think is a reasonable price and often suggest you split the difference... and you lose.

Conversely, often a buyer will come to a seller with a low anchor – a price that is obviously unreasonably low, but helps put the negotiation in a downward direction. Again, they don't necessarily expect to get the low price, but use it as a place to start and adjust the sellers thinking.

Other Factors

Obviously, there are other factors in negotiating a sale or purchase, and understanding these factors can only help you come to a more satisfactory outcome. For instance, when Pete Fortunato, another real estate wizard from Tampa Bay area, looks to buy a property, he will often ask the seller, “Why would you sell a beautiful house like this?” This gets people talking and often reveals the strength of their motivation and other needs that let you, the buyer, make a more informed offer that best meets those needs.

Sometimes you can get this information from an agent, but keep in mind that even the guy showing you the house is working for the seller – the one who pays them. Beyond that, there are some things the agent is not aware of, and they are trained to deflect some of these information gathering questions.

The Magic Words

The magic words work best when you are dealing face to face with the buyer or seller. When you are talking about price, which ever side of the table you are on, listen to the number thrown out. Think about it with no reaction and ask in a non-confrontational tone, “Is that the best you can do?” Then close your mouth.

The other party may try to justify the price as you listen quietly or will say they can take less if they are selling or pay more if they are buying, One of the largest drops, percentage wise, I got right off the bat was a probate condo that needed some work and the heirs were looking to get rid of. I knew what the asking price was because I saw it in their Craigslist ad. However, after looking the place over, I asked the lady about the price.

She told me they were asking $35,000. I paused and looked around the room and asked, “Is that the best you can do?” She thought for a moment and came back with, “we can take $30,000”. That was a 15% price drop just by asking one question... and the negotiations were off and running.

This works best when you are working with individuals, but variations can be used with agents, but with lesser impact. It's always worth a try, except when they try to get you into a bidding war with escalation clauses and other people bidding against you. If it's a place you really want to live in and are willing to pay top dollar – go for it. If it is an investment, you probably want to keep looking.

Other Uses

This magic phrase is not restricted to real estate negotiations. It can be used anytime you deal directly with a seller or even a business with variable prices,

Years ago I used to make several trips a year up and down the east coast on I-95. I would drive for a while until I felt myself getting too tired to go on safely. I would get off at one of the exits surrounded by hotels and motels. I would pick on of the mid-range to nicer places and ask the clerk about the price. Whatever they told me, I would ask, “Is that the best you can do?” and more times than not, they would give me a lower price, just for “wagging my tongue” as Ron would say.

There is nothing wrong with places like Motel 6 or Super 8, but don't expect to get much of a discount there. They just don't have that much room to adjust.

Biggest Takeaway

A lot of people are put off by the idea of negotiating a price – that is why many car dealers advertise a “no haggle” price. There are many skills involved in getting the absolute best price, whether you are buying or selling. This is a good place to start and the worst that will happen is you will be told, like I often told realtors, “That IS my highest and best price.” No one has smacked me upside the head yet.

As they used to say on the old TV commercial, “Try it, you'll like it.”

Happy Independence Day!

What this weekend is all about.  Enjoy the cookouts, but we can't forget that anyone born here or comes to join us has already won life's lottery.