Sunday, July 26, 2020
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.
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.