How to Buy Your 1st Home with Bad Credit and No Bank Qualifying.
Have you ever heard someone say any of these things about buying a home….
· You need to have good credit.
· You need a down payment.
· You need to have been on the job for at least 2 years.
· You have to qualify for financing.
· I am here to tell you that these and many statements like them are all lies!
The fact is nobody regulates who can and who can’t buy a home. The truth is home ownership is available to anyone and everyone regardless of race, credit, or cash down, if you know what you are doing .Throughout this report I am going dispel some of the common myths that keep people from even trying to go out and get their own Home. Myths that are orchestrated by real estate agents, banks, attorneys the very people most people turn to advise them on buying a house. Many if not most are ignorant to strategies that would allow you to buy your home today. Oftentimes it’s in their best interest to keep you enslaved to a life of renting. Let me give you a few examples.
Real Estate Agent Friend or Foe?
Look at the local run of the mill real estate agent. He gets paid when you buy property and escrow closes. Typically he’ll earn a 6% commission. On a house that sells for $100,000 that’s $6,000 right off the top. You have another 1-2% in closing fees. Even if the seller is desperate to sell and would finance the property to you, if you don’t have $8,000 down the deal can’t close because guess who won’t get paid. Many national broker chains do not allow the agent to discount the commission, so the deal is dead.
Even if you do have the $8,000 down, and if your credit is less then perfect, I’ve seen agents killing an offer because for some reason they think it their job to decide what’s right for the seller. Having been a broker for years I am often amazed at the huge egos some agents have when it comes to who they think should, or should not own property. Fewer then 10% have any knowledge whatsoever in structuring a transaction other then a strait 10-20% cash down to new loan transaction. This is just one example of several built in conflicts a real estate agent has in working with a “Nonconforming borrower”. After all they say “Why should I work for free”. They prefer to just placate you, and tell you to save your money until you can qualify for a new loan.
Banks and Lenders Are We There Yet?
Welcome to the world of double talk. Where rules and regulations flow like manna from heaven. There is only one thing I can count on with lending and that is that things change. That’s the good news and the bad news. There are hundreds and hundreds of loan programs out there. Its no wonder people get confused. Many of the loan rates we always see advertised are available to fewer then 10% of the general population.
The truth is approximately 67% of people out there have “Bad credit”.
You see credit is graded like a report card A, A-, B,C,D and not all lenders cater to all credit borrowers. To confuse you a little more, not all lenders keep the loans they originate. Many, if not most, are bought and sold on the secondary market. Depending on the “grade” of your credit, [determined by your FICO score], will determine what program you qualify for.
To top it all off not all lenders offer credit to all borrowers. For instance many banks only lend to “A credit score” borrowers because they portfolio or keep their loans and don’t sell them on the secondary market. So if you march into your local bank with a “B” credit score, they will turn you down cold . The loan officer you speak with may be completely ignorant of B,C,D paper credit programs out there, because they have never done one because his bank doesn’t do them. He could care less about you and your problem. Try borrowing from a bank if your self employed. My hourly employees that get a W2 have an easier time borrowing money then I do being the boss.
So if banks mostly cater to the “A credit score ” borrower what of the rest of us. Enter the world of Mortgage brokers and bankers. The resellers of the thousands of lenders.
Confusion with a Price Tag
Mortgage brokers get a cut or commission on loans they originate. They basically collect all the info from you and then ship it to the lender for approval and underwriting. Your mortgage broker’s experience and skill is critical to you getting approved because they manipulate your file and present it to the lender. How things are said, explanations, etc even the repor they have with the mortgage reps, make a difference on how a file goes. Enter the world of lender rebates, par pricing and lender fees.
Many mortgage brokers that say they have hundreds of lenders and they shop your file, may only work with a couple of companies. It has been my experience that brokers find a specialization and cater to that market. Some specialize in lower credit score programs “Sub par lenders” and other do “conventional” or “FHA, VA” government programs. It really pays to shop.
People get discouraged because they go to the wrong store looking for their loan, since they don’t realize there is a difference in lenders. It is important you ask allot of questions.
The loan process itself in its simplest form is confusing and time consuming. You go through a series of approvals personally as well as for the property. Every “i” must be dotted and “T” crossed in order to have it fund at the close. I have even seen lenders not fund a deal because they ran out of money, even though the paperwork was done correctly. They lose funding on wall street or change the program at the last minute. Any thing to save face and blame someone other then their own confusion.
What about my Lawyer?
But what about my attorney, he can help me? It has been my experience that many people use attorneys in the wrong way. They are advisors and their job is to point out options for you and address the issues that may pose legal problems down the road, but it is up to you to make the decision. Too often people go to their attorney who handled their will or divorce asking questions about real estate. There are many areas of law in which to specialize. Real estate contract law is a specialty that varies in every state.
The egos in the world of attorneys is deplorable and a disservice to their profession. “I don’t know” is not in their vocabulary, or worse they give advice in an authoritative manner that is strictly an opinion. An opinion on a topic they have no specialized knowledge of. Remember one thing that if you enter an agreement with a person that agreement is only as good as a mans word. If you look them in the eye and your gut says run, even the best written legal document in the world won’t solve your new problem. I have found many attorneys “Don’t know” or inherently dislike “Creative real estate strategies”. There are ways to mitigate concerns brought on by “Creative real estate strategies”. Given the choice between getting a home today, or renting, many buyers are willing to take an informed chance. However my advice is to always consult a legal professional, just make sure they actively know and do real estate. A good Real Estate attorney is worth its weight in gold. It is especially advisable to consult an attorney when you do not use a real estate agent. You can get allot of legal advice for a 6% commission.
Myth: Its better to Own
Fact: It’s better to control then to own
Why is it that the rich people in the world today, don’t really own anything, but control everything? They spend thousands of dollars setting up trusts and various asset protection strategies that transfer ownership to their children or corporations etc. Why do they do it? Aside from tax benefits, they do it because they realize that controlling an asset gives them the same benefits as ownership.
For instance when Sears or a similar retailer leases mall space from the mall developer. They have all the benefits of owning their store in the mall. They lock it’s doors , say who works there, paint the store etc. They have what you call a leasehold estate for a set period or time. They control all aspects of that space. They can do with it what they will.
Buy Your 1st Home with a Lease with an Option to Purchase
Doesn’t it make sense that if rich people and many business control their estates through leases you could to? Absolutely, and you can do it regardless of your credit rating and without any big cash down payments. In a moment you will ask yourself “Why would I ever want to Own a house?”
What does it mean to lease with the option to purchase, and what are the advantages?
When you lease a home you are entitled to all the benefits of ownership for a set duration usually a year or years depending on how you set it up. You decorate it how you want, say who can be there when you want, paint it etc. You can do all the same things a homeowner does. The major difference is that the title is vested in the landlords name and the mortgage is in his name as well.
When you have an “Option” to purchase a home you have the right, not the obligation, to purchase the home for a predetermined price and terms etc. Basically you lock the seller into what price they will accept for the property. The loan stays in the seller’s name. Did a light just go on? Why would you ever want to have a mortgage in your name when you can still live in the property and control it just like you own it. You are able to control the asset (Home) for the same price you would have paid for it if you would have gone out and qualified for a new loan.
Advantages to You
When you structure a lease purchase correctly, you control the property just like you own it. Some advantages to you the homebuyer are :
· Check out the neighborhood, schools, etc before you lock yourself in.
· Get in without bank qualifying.
· Get in with little or no money out of pocket.
· Structure a monthly rent credit that accumulates to a down payment.
· Locks in a price today so when the property appreciates “You win”!
· Move in today.
· Gives you time to clean up “bad credit”
You may ask, “Why hasn’t my real estate agent or lender told me about this?
BECAUSE THEY DON”T GET PAID!
Why would they tell you how to buy a house if they don’t get anything? Sometimes in depressed markets I’ve seen agents that will wait for a commission when you eventually refinance the property. The problem is they try to shorten your option period.
It is in your best interest to lock in a price today with an option agreement with the seller for as long as possible. 5 –10 years. An agent will want the lease period to be as short a term as possible.
Find Motivated Sellers
There are many reasons sellers are willing to sell their home with a lease purchase option. The number one reason is debt relief or payment relief. Maybe they have bought another house and can’t make two payments. Another motivating factor for selling fast is divorce, or a job transfer, death, downsizing, etc. the reasons are endless. You see, the key to buying a home for no money down, and without credit is to find people who want to sell more then you want to buy. I call them “Don’t Wanters”. Many “Don’t Wanters” only have a few thousand dollars of equity, so they can’t sell with an agent because they can’t pay the 6% commission. They are in the exact opposite situation that you are in, but their desperation to sell, is greater in many cases, then yours to buy.
When you find these types of sellers its easy to make a long term win win deal.
As you can probably tell from this, its important that you structure an offer to a seller that benefits you. There is no such thing as a standard agreement in my opinion. Some forms are more commonly used than others geographically. Most have a slant one way or the other in favor of the seller or buyer. You want to make sure you use a form and complete it in such a way to be fair but also to protect your buyer interests. Ask for things that protect you the buyer.
For instance you want to control the term and the time that you allow yourself to refinance. I ask for a 10 year lease with extensions then back off from there. Remember when you have an option you don’t have to buy the property. I always will get the right to sublease should I decide to move. I like to ask for monthly rent credits each month that credit to the purchase price and build equity. I like to have the property title put in a trust and have the interest in the trust transferred to me and held by escrow. I require all payments be tracked and paid through a long term escrow, so as to assure the Seller makes all the payments to the underlying lien holder. I also require a memorandum of option be recorded, so the seller can’t further encumber the property.
You can see that even though it is a relatively easy concept to grasp. The mechanics of structuring a lease purchase option so as not to get burned is allot more detailed. It’s important that you take the necessary steps to protect you, the buyer, when you set up your purchase. That is why it is so important that you use experienced professionals or coaches. Even the best structured deal has an element of risk.
Buy on a Contract:
Another vehicle to purchase a home for little cash down, and with bad credit is on a contract or agreement for deed. Depending on how you structure it, title will stay in the sellers name or pass to the new buyer. In some states the title companies can wrap the underlying financing while others states won’t allow title insurance to be issued with wrap around financing if it violates the due on sale provision that is contained in almost all institutional financing. The basic premise of a contract is that you control the asset (Home) through a contract that will give you the benefits of ownership. The underlying financing stays in the sellers name and they wrap around the underlying mortgage. It’s a great way to buy a home.
Where Do I find these Homes?
You may be saying this sounds fantastic but where do I find these kind of sellers.
The first thing I would like to do is invite you to let go of your traditional views on finding a home. Rather than looking for a particular house on a certain street, think more in terms of finding a situation, or a problem that you can solve for someone. You see one mans nightmare is another mans fixer upper.
Focus on the “Why” not the “What”
You want to focus on the “Why” people are selling rather then the “What”. Real estate listings tell us the “What’s”, like number of bedrooms, baths, square feet etc. They neglect to tell us the “Why”. Why they need to move, the people problems. It’s not the real estate agents fault they can’t tell us, it is a by product of all the agency laws that have been passed over the years on who is representing who. It used to be you could look in the (MLS) Multiple Listing Service, and see what people owed and how much their payment was, but not anymore.
The best way is to talk with the Seller’s yourself and ask them lots of questions to determine the “Why” so you can solve their problem. If you fail to find out “Why” even an all cash offer for full price may not be what they want. Ask questions.
Local Classified Ads
Calling newspaper classifieds is a good place to start. You will want to look for ads that talk about the seller’s motivation, and homes that are offered “For Sale By Owner “ and not listed with an agent. Be prepared for some grumpy people, as some won’t like to give out information. It will be up to you to extract the critical data to see if it is even a possibility of structuring a lease purchase. It’s best to get as many facts and answers to the “Why” questions before you go out and look at property. You will save a great deal of time and frustration. What you are looking for is sometimes more of a feeling then specific answers. You are prospecting for flexibility and desperation. It manifests itself in emotion that is sometimes conveyed in voice tone and inflection, more then what is actually said. You want people that will be open to you solving their problem.
Don’t forget Investors
Another great place to look for motivated sellers is to look in the real estate wanted section of the paper. Call the real estate investors that are advertising “We buy houses” and ask them if they have any lease option purchase properties. You might be surprised. Many investors at times need to turn inventory and become big time “Don’t wanters”
Let Sellers come to You
Another great way is to have property come to you. If you don’t like to go outside your comfort zone try placing an ad in the classifieds saying something like this:
Couple looking to lease
with option to purchase
1st home Cliffside area
$100K range. Call 555-5555
I have ran an ad like this many times over the years and bought property . A few years back I leased with the option to purchase my own personal residence. It was a beautiful 5,600 square feet all brick home on 3 acres in the country. It appraised for $469K and I had an option price of $327K with a payment of only $1,200 a month. The Seller fed the payment $1,500 a month. He was desperate to get out, and was credit conscious, so he fed the payment. I lived here for 2 years until I found another home I liked better.
Once you have found and negotiated your new home its time to get in and clean up those credit issues that have stopped you in the past from utilizing your credit. Even if you structure a long term purchase it is comforting to have credit available in times of emergency.
Isolate any Bad Credit
Refinance or Sell for a Profit
Your on time payments that you make to the escrow company will help in a big way in getting the property refinanced when the time comes. They can report it to the credit bureau and it will get you a mortgage rating even though you don’t have a mortgage. Along with the monthly regular rent credit, if you had it in your agreement, and any equity appreciation, you should have a nice chunk of equity when the time comes. Any improvements you’ve made since you moved in will also benefit you. All this equity accumulation can happen because you have a right to buy the property at $100k, but now your home has increased in value to $130,000 so the $30,000 equity is yours! Just like if you had “owned it”. You may even decide to move at this time and sell this home to another party and pocket the $30K .
Over the years I have earned over a million dollars buying and selling property without cash and without credit. And at the very least own a piece of the American Dream, Your Own Home. All the best!
Buy your first home with bad credit or no money down
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August 11, 2006
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