“What is your credit score?” That was the question one of my best friends asked me at lunch a few weeks ago.
After the six of us at the table shared our FICO (Fair Isaac Corp.) scores, my friend proceeded to tell us how one of his former apartment tenants just bought a condo even though his FICO score is only about 600.
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The rest of us were very surprised. Then we realized, today there is a home loan for virtually everybody who has a decent job and who wants to own a home, regardless of their credit.
CHECK YOUR CREDIT BEFORE SHOPPING FOR A HOME. As savvy home buyers and their real estate buyer’s agents know, it’s smart to check your credit reports before shopping for a home. Fix any errors before applying for a mortgage so you will get the best possible interest rate and terms.
Although you can obtain one free credit report each year from each of the three nationwide credit bureaus, Experian, Equifax and Trans Union, at www.annualcreditreport.com, that source will not provide your all-important FICO score, which most mortgage lenders use to qualify applicants.
Today’s mortgage lenders look primarily at your FICO score when qualifying borrowers. In fact, I’m told most mortgage underwriters don’t even read the applicant’s credit reports if the FICO score is at least 680.
FICO scores are based on (1) the length of your credit history (the longer the better), (2) the percentage of available total credit currently being used (try to stay below 50 percent), and (3) your on-time payment history. FICO scores do not consider your income, age, race, nationality, etc., assets, or cash down payment available.
The best place to obtain both your FICO score and all three credit reports is at www.myfico.com. For about $45, you can instantly receive this important information. Then study your credit reports and follow the instructions to correct any errors.
Each credit bureau has 30 days to “verify” any incorrect information. If the creditor doesn’t verify the information, such as a 30-day late payment, then it must be removed from your credit report. The result should be an improved FICO score. Ask each credit bureau to send you a corrected copy of your credit report after 30 days.
GET PRE-APPROVED FOR A MORTGAGE. After you’ve checked your credit reports, corrected any errors in those reports, and obtained your FICO score, it’s still not time yet to shop for a house or condo.
The next step is to get pre-approved in writing by an actual mortgage lender. If your FICO score is below 620, look for a mortgage lender specializing in subprime mortgages.
You may be surprised most major lenders offer these loans. To illustrate, I’m told that Wells Fargo Mortgage is not only the nation’s largest home loan lender, but also the nation’s largest subprime lender to home buyers with low FICO scores.
Be sure you obtain a pre-approval letter from an actual lender, not just a so-called “pre-qualification letter” from a mortgage broker. A pre-qualification letter means: “We think you can get a mortgage but we haven’t checked out your loan application yet.” If you have a low FICO score, a mortgage broker can obtain a pre-approval certificate from a lender who specializes in low FICO score mortgages.
Most mortgage lenders do not charge for pre-approval certificates. They know once you have their pre-approval, you aren’t likely to shop further for financing. But some lenders charge a modest fee, such as $200, which is applicable toward closing costs.
The reason it is so important to obtain mortgage pre-approval is then you know what price range home you can afford and the maximum mortgage available.
DON’T LET LACK OF CASH STOP YOUR HOME PURCHASE. If you are “cash challenged” without much down-payment cash, don’t let that stop you from buying a home. In today’s “buyer’s market” for houses and condos, meaning there are more residences listed for sale than there are qualified buyers, sellers and lenders are becoming very flexible in their quest to make sales.
Prospective home buyers who have good income and good credit, but little cash, should consider 100 percent “nothing down” mortgages. Some lenders even offer 103 and 107 percent mortgages to include closing costs in the mortgage amount. FHA and VA mortgages also offer low- and zero-down-payment alternatives.
However, the monthly payments on low-down-payment loans can be high. But home buyers who plan to fix up their home purchases to increase the market value might want to proceed anyway and then refinance in a year or two. Just be sure the mortgage doesn’t contain any prepayment penalty.
Whenever possible, low- or zero-down-payment home buyers should avoid PMI (private mortgage insurance) mortgages. PMI premiums, which cost $100 or more per month, protect the lender if the borrower defaults. But PMI premiums are not tax deductible.
A better alternative to PMI is to obtain a first mortgage of 80 percent or lower, and a seller carryback mortgage or a home equity loan for the 20 percent balance of the purchase price, thus avoiding PMI premiums.
ALTERNATIVES TO OBTAINING A NEW MORTGAGE. If you have really bad credit, or just don’t want to jump through a mortgage lender’s 100 flaming hoops, there are alternatives so you can still buy a house or condo, perhaps while you improve your income and credit situation.
My personal favorite (not that I have bad credit) is the lease with option to buy. I’ve used this method many times over the last 25 years to buy and sell houses, including my current personal residence.
Although a few lease-options are advertised in newspaper classified ads, most are created by asking a landlord, “If I lease this house (or condo), will you give me an option to buy it?” Because many landlords would prefer to sell, they will gladly agree to a lease-option with a partial rent credit, such as 33 percent, toward the purchase price.
Another alternative to obtaining a new mortgage is to offer to buy a home “subject to” its existing mortgage. Many of these residences are advertised as “assume existing mortgage” or “take over mortgage payments.” However, buyers should be careful that the home is not over-encumbered for more than its market value. That’s called an “upside down” home.
Still another alternative to obtaining a new mortgage is to ask the seller to carry back a first or second mortgage secured by the home. My experience has been retirees are especially eager to do this to provide secure retirement income. In today’s market, offering the home seller a 6 percent interest rate is a “good deal” for both the seller and the buyer.
SUMMARY: Even if you have bad credit, or are “cash challenged” for a down payment, there are many ways to buy a house or condo in today’s buyer’s market by following the recommendations above. More details are in my new special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
