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If you’re having trouble getting a traditional mortgage loan you might think you simply can’t buy a home. But fortunately there are a number of strategies you may not have considered.
Which one you should use depends on why the banks won’t lend to you. You might have a low credit score, a short credit history, a recent job change, or an insufficient down payment.
Even an open credit report dispute can prevent a mortgage loan approval. A lender once required my wife and I to pay off an old bill in order to approve our loan, and it was a doctor’s charge that, in our opinion, we didn’t really owe.
Some of the reasons for denying your loan have nothing to do with your ability to pay, or even any past credit problems. In the past, two banks would not consider our primary income on a loan application because it came from a business that was less than two years old.
But even if bad credit or other problems have prevented you from getting a traditional mortgage, there are ways to buy a home. Here are ten of them, starting with the most unlikely…
1. Pay Cash
It isn’t easy, but it is possible. My wife and I have paid cash for several homes even though we’ve rarely worked full-time jobs in our lives. I’ll explain how, but first let’s look at raising the money for a cash purchase.
You need to consistently set aside money. For example, if you can afford a $450 monthly car payment but instead drive an old car with no payments, you can save $5,400 per year. If you add tax refunds to that in a three or four years you might have more than $30,000. In another couple years you could top $50,000.
Believe it or not, that’s enough money if you’re able to and willing to move. And no, you don’t have to live in a depressed area of Detroit to get a cheap house, although Realtor.com shows many homes there are under $3,000.
Instead, do your own research to discover small towns where you can find inexpensive houses. For example, in Alpena, Michigan you can find dozens of solid homes for under $50,000, and in Independence, Missouri the houses start at under $20,000.
My wife and I saved enough to buy our first house together for $17,500 cash, in Anaconda, Montana. This was over a decade ago, and the mountain town that has since been discovered and has become more expensive. Still, our condo here in Tucson, Arizona, cost just $55,000 six months ago. We were able to pay cash in part because of equity gains in other homes along the way (we hate mortgages).
If you can’t find a regular house that’s cheap enough to buy with your savings, consider the next option…
2. Buy a Mobile Home
I’ve written about the advantages of mobile homes, and my first home was a mobile on a small lot. I bought it for $19,500 and sold it for $45,000. Appreciation is nice, but there are two advantages that are more relevant when you’re having trouble getting a mortgage.
First, mobiles cost less, so you more likely to pull off a cash purchase. If you can’t afford one on land you might pay as little as a few thousand dollars for a mobile in a park. That can make sense. For example, if your lot rent and basic maintenance cost less than renting a house or apartment you can bank the difference and eventually buy a house.
The other advantage mobiles have is that owners are more likely to finance them because there are fewer traditional lenders for mobile homes. That brings us to our next strategy…
3. Have the Seller Provide Financing
I found my first home with an ad that said something like, “I have a $3,000 down payment and want to buy a mobile on land.” Despite the seller’s willingness to play banker I ended up getting a mortgage (more on that later). However, I later sold that home and a rental home on payments, the latter with just $1,000 down — and I did not do a credit check on the buyer.
The bad news is that sellers often provide financing as a way to get a little more for the home. This is especially true if they’re willing to sell on payments even though you have credit problems. On the other hand, if you buy a small place costs you less every month than what you would otherwise pay for rent, and you buy it in a rising market, paying top dollar isn’t necessarily a problem.
Seller financing is typically in the form of a mortgage or contract for deed (also known as a land contract). Unlike with traditional lenders there are no loan fees or “points,” and a seller will not make you pay for an appraisal (he’s not going to question whether this own home is worth what he’s asking). The lower borrowing costs associated with seller financing can partially make up for a higher price.
4. Get a Lease Option
A lease option can be structured in various ways, but you typically you pay higher-than-normal rent and part of it is applied to the eventual purchase of the home if you exercise your option. For example, let’s assume you’re looking at a home priced at $120,000 which would normally rent for $900 per month.
The seller might agree to rent to you for $1,200 per month for two years and apply $500 of that toward the eventual down payment. That would give you $12,000 for a down payment if you close the deal at the every end of the lease period. If you choose not to buy you do not get the extra rent back (one reason sellers like these deals).
The idea here is that you build up a down payment and have time to fix your credit, get a couple years in at a job, or do anything else that will enable you to get a mortgage loan when the time comes.
Make sure you ask the right questions and understand the contract if you go this route. These deals are normally more complicated than our example, and sometimes require a non-refundable option fee.
5. Improve Your Credit Report
If your inability to get a loan is because of your poor credit report, it’s time to improve it. Here are four things you can do…
- Get a copy of your report to see where you need to focus your efforts.
- Challenge any incorrect items that might hurt you.
- Resolve any disputes (even if that means paying bills you may not owe).
- Work to lower your credit utilization ratio.
Sometimes you can increase your score quickly, but it can take years for negative items to drop off of your report. If you have a good explanation for any of them you can add a 100 word statement to your credit report, and every creditor who pulls the report will see it.
Before you do any of this, though, you might want to ask a friendly lender what they need to see in order to lend to you. That will give you specific goals to work on.
6. Work on Your Job or Business Longevity
If you have any plans to change jobs do it after you close on your new home. Mortgage lenders usually want to see two years on the job as a minimum, or two years in business if you’re relying on that type of income. It might seem that waiting is the only solution here, but there are a couple ways to get around these rules.
For example, one lender told me that my business start date was not when I formed an LLC, but when I actually started the business, which was at a much earlier date. You might be able to report your business as starting when you first bought business cards or earlier.
Also, if you were hired for your current job a month before you started you can probably put down the date of hire as your start date (ask).
Finally, consider an FHA loan. FHA rules for employment consider several factors in determining your “probability of continued employment.” You do not always need to have two years at the same job to meet the criteria.
Sometimes lenders want to see that if you have changed jobs recently you did so to advance your career. That means your current job should be in the same industry, or one that’s closely related. So when you’re filling out that job history part of the application, make sure your current and past employment positions appear to be related (without lying, of course).
7. Make a Bigger Down Payment
Lenders want a debt-to-income ratio of 43% or lower, and that includes all of your debt. If your projected ratio is too high even after paying off credit cards, you can make a larger down payment. In that way you’ll borrow less and you may get below the 43% maximum.
How do you come up with that larger down payment? Saving money is the obvious solution. But there are also a couple ways to avoid the wait.
First, sell anything you don’t need, like furniture, a coin collection, exercise machines sitting in the basement, etc. If you’re making payments on a car that’s worth substantially more than what you owe, sell it and buy an older vehicle. In that way you can simultaneously raise cash and lower your debt.
Second, ask for help from mom and dad. Lenders allow a portion of your down payment to be a gift from a family member (ask about the specific limit). That brings us to our next strategy…
8. Get a Loan From a Family Member
Maybe the banks don’t trust you, but your family knows you’re a good risk. If you get a mortgage loan from mom or dad or a sister, you not only can get a decent interest rate, but you can avoid many of the typical loan fees and other costs.
The benefits of borrowing from family go both ways. Your family lender might be very happy to make more than the piddling interest earned in a bank savings account..
This doesn’t work in all families, but it may be worth a try. I’ve loaned to family members and borrowed from them several times without any problems. It has always been put in writing and done at a fair interest rate.
9. Borrow From the Right Banks
If your loan doesn’t meet the requirements of the secondary mortgage market the lender can’t sell it, and you’ll probably be denied. Not meeting those requirements might be due to your credit and income profile, or because of the type of house you’re buying.
One solution to this problem is to find a bank that keeps its own loans. These banks can be much more flexible. For example, my first mortgage loan was for a mobile home on a small lot, which I bought while unemployed. The banker was satisfied with my promise that I would be going back to work soon (the 25% down payment helped too).
These banks are usually called “portfolio lenders,” and you might find them by Googling that term plus the name of your community. Otherwise try calling small local banks.
10. Have Someone Co-Sign Your Loan
First the bad news: TheMortgageReports.com says “a cosigner with good credit does not cancel out a borrower’s bad credit.” In other words if your primary problem is a horrible credit score and a bunch of unpaid bills on your report, you probably still won’t get the loan.
Now the good news: A co-signer’s income is considered to determine how much you can borrow. So if your primary problem is income-based, as in low wages or income that can’t be considered by the lender (like that from a new business), having a family member or close friend co-sign can be the solution.
Have you had trouble getting a traditional mortgage loan, and what did you do? Tell us about your experience below.