How to Buy a House
By Steve Gillman - 2006
There are many people who will tell you how to buy a house,
but they only explain the process, assuming you are ready and
able to buy. But what if your problem isn't that you need help
with writing an offer or closing the sale? What if you have bad
credit or low income or no down payment and it seems that there
just isn't a way to get into a home of your own?
The requirements for mortgage loans are being tightened again.
Most lenders are once again asking that you have a down payment,
and a decent income. And though a few short years ago a bad credit
rating simply meant paying a higher interest rate, now it can
mean not getting any loan. However, there still is hope for those
with these problems. Lets look at how to buy a house when the
bankers say you can't.
How to Buy a House with a Low Credit Score
If your credit problem isn't too serious, you may still be
able to get a traditional loan in several ways. To begin with,
you can correct any errors on your credit report, and challenge
any entries you think shouldn't be there. This is your legal
right. If you can get it changed, then once those changes are
reflected in your credit score, you may be able to apply again
and get a loan for that home.
You also can go only to lenders who hold their own loans "in
house." This means they don't sell them into the secondary
market, which means the loans don't have to meet certain requirements.
A bank which holds its own loans can make there own rules (to
an extent). Ask around to see if some of your local banks or
credit unions keep mortgage loans in their own portfolio.
A more creative way to overcome bad credit is to buy a house
with another person. This isn't only for married couples. Any
two people can buy a home together, and the lender will look
at both credit histories. It might be tricky to buy a house with
a friend, but it can be better for both compared to renting.
For example, you might have a down payment, and your friend could
have good credit. You could agree to sell the home five years
later to recover your down payment and each of your respective
shares of the equity that is built up from appreciation and the
paying down of the loan.
Seller financing as another way to buy when you can't get
a loan because of bad credit. I've seen homes sold without credit
checks and even with nothing down by sellers who financed the
purchase. Their motivation is usually to get a higher price and
/or to sell a problem property, but this doesn't rule out a good
opportunity for you. When sellers don't offer terms, find out
if they own their houses free and clear. If so, make offers that
involve payments to them rather than getting a loan from the
bank. Offer a bit more than they expect if you can, and you will
be more likely to convince them.
How To Buy A House With Little Cash Or Income
Perhaps a lack of cash is your problem. If so, you can start
by making high offers on those houses that might be sold with
zero-down seller financing. Buying a home with a friend who has
a down payment is another possibility you might look into. A
few mortgage lenders out there still offer zero-down loans too.
A proven method no one seems to like much is to save the money
for a down payment on a house. You'll have to put off owning
a home for a while, but that may be a good thing. As an example,
in 2005 it cost $600 more per month to buy a house than to rent
an apartment in some towns. Had you been able to afford the house,
but had no down payment, you could have banked the $600 you were
saving by renting each month. Three years later you would have
about $23,000 for a down payment, and meanwhile home prices fell.
Not a bad deal.
If your problem is low income it may not be the right time
for you to buy a house, especially if the cost of buying is significantly
higher than the cost of renting where you are. But if it it will
cost you about the same each month to buy as to rent, try everything
above to get into a home. Rent can rise faster than the cost
of owning a home, particularly if you are wise enough to get
a fixed rate mortgage loan.
There are also cheaper options than the usual starter homes
real estate agents push you towards. For example, my first home
was a mobile home on a small lot that cost less than $20,000.
I later sold it for $45,000. The monthly payment was just $257,
which certainly beat renting. You can also see that the idea
some have about mobile homes not appreciating is just plain wrong
(the land is where the value is).
Other ways to buy a house when your income is low and you
have no money? If your income will be rising soon, you might
look for a lease-option arrangement. Rent a house on a monthly
basis, but with an option to buy it at a set price within a set
time (try for two years). This gives you time to save money,
improve your credit, and increase your income, so you can get
a loan the usual way.
Purchasing a small lot for is another way to get into a home.
Often the sellers of small lots don't worry about credit ratings,
or large down payments, because they know you can't damage a
piece of land as easily as a house. They feel secure selling
their land with little or nothing down and they enjoy the interest
they collect. Of course, your goal is to get your finances and
credit in shape as you make those payments. Then you can get
a mortgage loan in a couple years, and put a house on your property.
Keep looking at all the possibilities out there. I used to
know an unemployed man who bought a four-plex with nothing down
and used the rent from three units to pay all the bills while
he lived in the fourth. There is almost always a way to buy a
house if you persist.