How To Buy A Home With Bad Credit And No Money
For many, the home you purchase will be one of the biggest investments made. Owning a home provides multiple benefits. For starters, you will cease from making your landlord richer and start putting money into an asset you own. An asset that can generate you an income, that can be sold for profit, or that can be transferred from generation to generation. Owning a home is one of the seven cures for a lean purse discussed in the book, “The Richest Man in Babylon” by George S. Clason. So how do you buy a home with bad credit and no money?
For most people who suffer from poor credit scores, no credit scores, or little to no cash reserves, the option to purchase a home is out of the question; or so they think. There are many ways someone can still acquire a piece of real estate with less than perfect credit and little to no cash on hand.
One way is to buy a home at a wholesale price. Wholesaling a home does not require a credit check, loans, or cash. Wholesaling is the process to where you negotiate with the seller of the home for a very low price, place the property under contract, and then flip the contract to another investor with a five percent margin or more. For example, say that you have a seller who has a house that is worth $100,000 in perfect condition. The house needs repairs, the home is distressed, and the owner needs cash, quickly. The seller, in order to sell the home quickly, may elect to sell you the home for $65,000 in it’s as-is condition. You, the buyer, could contract the home and then sell it to another investor for $70,000 who would then do the repairs and provide the financing to purchase the property from you, which would also pay off the original owner. You, the wholesaler, would net a $5,000 profit from this real estate transaction with no credit check, no personal guarantee, and no cash out of your pocket.
Another way is called “Subject-to”. This is where, you the buyer, could purchase a house subject-to the existing mortgage that’s already in place. This is not an assumable mortgage because that may require a credit check. This is where the owner of the property, who has an existing mortgage, agrees to deed the home over to you and you agree to take over the payments. The existing mortgage will stay in the seller’s name, but you would be responsible for making the payments. There are no credit checks required and no upfront cash needed in many cases. Occasionally, the seller may ask for some “moving” money or pennies on the dollar for their equity if they have any.
You could also rent to own a home. There are companies and investors that will purchase a property for you and lease it to you with an option to purchase it from them at a later date. This is a great option to purchase a home if you are facing credit challenges and are having trouble qualifying for a loan. You won’t own the home in the beginning. You start off as a tenant but you will work your way towards being able to secure the deed of that home with your own financing. This is a great option for a buyer to enter a home, live in it while their credit is being worked on, and then exercising their right to purchase six to eighteen months down the line. The terms are usually set by the owner or investor of the property and don’t require perfect credit or a down payment upfront to enter this agreement.
If you have cash saved up but can’t get bank financed due to poor credit scores, don’t fret. There are also mortgage lenders that offer FHA home loans with credit scores between 520 and 640. If your credit score is between 520 and 579, you could find a lender that could issue you a loan with a 20-30% down payment. The interest rates may be on the high end to offset the risk the lender is taking on and they may require more documentation upfront to approve you. Such documentation required would be two years of rental history, two years of bank statements, no late payments or collection accounts reported to your credit within the last twelve months, and a 45% debt-to-income ratio or lower. You’ll want to search for a mortgage lender who offers this program as not all mortgage companies offer these types of low score options.
If you have a little cash and decent credit, usually the best route to go would be an FHA or Conventional mortgage. Traditionally, most mortgage lenders require a 580 credit score or better and only 3.5% down payment. The closer your credit score is to 620, the better. With a 580 credit score, most lenders will require a 43% debt-to-income ratio, three months of reserves in your bank account, and will do a manual underwrite, which means it will take longer to approve you. With a 620 credit score, you could have a 55% debt-to-income ratio, no reserves, and a smoother underwrite which means a faster approval.
If you have a little more cash and great credit, the best loan product out there is called a Conventional loan. The main difference between an FHA loan and a Conventional is the government insurance. Conventional financing allows you to opt-out of this insurance which will lead to a lower payment and because you have stronger credit, this will lead to a better interest rate.
As you can see there are options available to the consumer to purchase their share of real estate with no money or bad credit. In order to determine which route is best for you, you should always consult with a licensed mortgage professional or a licensed real estate agent.