I Have Less Than Perfect Credit...Can I Still Purchase A Home?
Fortunately, you may be able to still purchase a home, even if you have bad credit...it’s done much more often than you realize.
Unfortunately, bad things sometimes happen to good people, thus resulting in less than perfect credit.
I have a friend who had some significant medical challenges costing tens of thousands of dollars in medical bills. The result...credit that is less than perfect!
I have another friend who’s house went to her spouse as part of her divorce decree established by the courts. Her ex-husband quit paying the mortgage payments, thus letting the bank take it back (this is called a bank foreclosure). Even though the divorce decree said that her ex husband was solely liable for the mortgage payments on the mortgage loan, my friend’s credit was still unfairly, adversely affected since her name was on the loan with her ex husband’s when the house was originally purchased. The result...credit that is less than perfect!
I know someone else who tried his hand at real estate investing and rental properties...several properties purchased later, tenants who tore up his property, contractors who robbed him blind, credit card debts out of control due to the house repairs, mortgage payments that couldn’t be made, and banks foreclosing on his properties...The result...less than perfect credit.
With that being said, just because you may have less than perfect credit, you aren’t a bad person. Don’t get me wrong, there are people out there with less than perfect credit who are also deadbeats, but just because you have less than perfect credit doesn’t make you a bad person.
With that being said, I’ll describe below a few different ways to still purchase a home and realize some of the income tax benefits of home ownership.
Land Contract
The first way you can purchase a home is referred to as a “Land Contract,” sometimes called an “Agreement for Deed.” In today’s difficult real estate market, there are all kinds of people who can’t get their homes sold, no matter how hard they try. You won’t typically find these homes on the Multiple Listing Service (MLS), but will usually find them simply For Sale By Owner (FSBO).
For a variety of reasons, people are trying to sell their houses, and they may simply be looking for mortgage payment relief. They may have already moved into their new home, haven’t gotten their previous home sold yet, and can’t afford to keep paying two mortgage payments.
In this case, you may be able to purchase a home under a Land Contract. Under this arrangement, with your land contract payment (instead of rent payment), you are making monthly principal and interest payments on your land contract loan each and every month. If you itemize your deductions, the interest portion is usually 100% tax deductible on your income tax return, and the principal amount pays down your land contract loan balance.
Therefore, when you deduct your land contract loan interest on your tax return each year, your income tax liability will go down, thus resulting in either a higher refund or a lesser amount owed on your tax return...hence...TAX RELIEF!
Land contracts are completely negotiable and can be spread over any number of years, but you won’t receive the deed to the property until the land contract loan is completely paid off or you refinance with a mortgage loan from a bank or other lending institution.
A lot of times, once you’ve made 6 to 12 months of consecutive, timely land contract loan payments (you’ll have to prove this), you may be able to refinance the home with a mortgage of your own, with much less strict credit history requirements.
Owner Financing
Owner Financing The second way you may be able to purchase a home is with “Owner Financing.” As mentioned earlier, there are all kinds of reasons why people try to sell their homes, but can’t, no matter how hard they try. Again, you won’t typically find these homes on the Multiple Listing Service (MLS), but will usually find them simply For Sale By Owner (FSBO).
For a variety of reasons, people are trying to sell an unwanted house, and may be willing to receive monthly cash flow instead of a lump sum of cash. They may have inherited a home from their parents, who lived out of state, and, even though the house is owned free and clear with no mortgage loan, they don’t want to continue trying to take care of the house and maintenance issues from a long distance. Or they may not want to sell outright just yet, as the real estate market in the area is severely depressed right now.
In this case, you may be able to purchase a home with Owner Financing. Under this arrangement, the seller is the mortgage “company” instead of a lending institution. Similar to a land contract payment, with your mortgage payment (instead of rent payment), you are making monthly principal and interest payments on your owner financed loan each and every month. If you itemize your deductions, the interest portion is usually 100% tax deductible on your income tax return, and the principal amount pays down your owner financed loan balance.
Therefore, when you deduct your owner financed loan interest on your tax return each year, your income tax liability will go down, thus resulting in either a higher refund or a lesser amount owed on your tax return...once again... TAX RELIEF!
Owner financed loans are completely negotiable and can be spread over any number of years. Most owner financed loans are 30 year loans, so after 30 years, you will own your home completely, free and clear of your mortgage loan.
A lot of times, however, once you’ve made 6 to 12 months of consecutive, timely, owner financed loan payments (you’ll have to prove this), you may be able to refinance the home with a mortgage of your own, with much less strict credit history requirements.
When this happens, you may also be able to negotiate an overall discount on the purchase price with the seller (the one providing the owner financing), especially if he or she has given you a very low interest rate.
Why should a seller discount? To get cash now instead of payments over a long term. The time value of money makes it worth much more today than in the future. The seller may be able to invest that lump sum of cash in an investment that earns a much better return than the interest rate being charged to you. But if you are not an expert at understanding the time value of money, don’t worry about this aspect.
"Subject To”
And finally, you may also be able to to purchase a home using a method called “Subject To”. Basically, this means that you purchase a home “Subject To” the existing mortgage. This typically happens when the seller is desperate, with no other alternatives. Now, I know you’re probably saying to yourself, “This NEVER happens!” But I’m here to tell you, this happens all the time in the real estate investing world.
Essentially, in a nutshell, a desperate seller will to purchase a home "subject to" their existing mortgage. As mentioned earlier, there are all kinds of reasons why people would do this. And once again, you won’t typically find these homes on the Multiple Listing Service (MLS), but will usually find them simply For Sale By Owner (FSBO).
Please understand that these houses DO have a mortgage on them, and you WILL lose it to the bank if the mortgage payment is not made.
Nearly every single mortgage nowadays has a “due on sale clause” in it, meaning the lender has the power to call the entire loan due and payable if title is transferred without the lender’s permission.
Does this mean the lender WILL call the loan due? Usually not! It’s rare for a lender to call a loan due if the payments are kept current. However, it is possible and does happen from time to time.
In my opinion, you should only purchase a home “subject to” the existing mortgage if the seller is aware the loan may be called due and is willing to sell anyway. This will only usually happen in cases where the seller is not credit conscious, and is willing to leave the monthly payments in your hands. Please realize, in this case, the seller may also be a few payments behind, which you will have to eventually pay.
In my opinion, you must also get a statement from the seller clearly stating that you are making no promises to pay off or assume the loan, that the seller understands the loan will stay in the seller’s name until it is paid off or assumed, and that you cannot be held responsible if the loan goes into default for any reason whatsoever.
Now, I’m not saying that you are trying to purposely let a home mortgage go into default, because your goal is to purchase a home. However, as mentioned above, sometimes bad things happen to good people, and you don’t want the seller to be able to come back to you down the road due to late payments or a foreclosure, and say that you ruined their credit. The seller must understand the risk involved, and be willing to take it anyway.
In this situation, you must have little or no money invested, and you haven’t guaranteed the loan, thus putting you in a no lose situation.
With all of that being said, if a seller is still willing to sell you their house “subject to” the existing mortgage, you can purchase a home without qualifying for your own mortgage. Under this arrangement and similar to a normal mortgage payment (instead of rent payment), you are making monthly principal and interest payments on the previous owner’s mortgage each and every month. If you itemize your deductions, the interest portion is usually 100% tax deductible on your income tax return, and the principal amount pays down the mortgage loan balance. Even though the loan is not in your name, you are entitled to the tax deduction because you made the payments.
Therefore, when you deduct your “subject to” loan interest on your tax return each year, your income tax liability will go down, thus resulting in either a higher refund or a lesser amount owed on your tax return...and once again... TAX RELIEF!
“Subject to” loans are less negotiable than land contracts and owner financed loans, and your payments are usually spread over the remaining term of the previous owner’s mortgage. Most “subject to” transactions, however, are received due to the owner of the home being desperate, and you can often times purchase a home for just the loan balance. After the remaining term of the previous owner’s mortgage, you will own your home completely free and clear of the previous owner’s mortgage loan.
Similar to the techniques explained above, once you’ve made 6 to 12 months of consecutive, timely, “subject to” loan payments (you’ll have to prove this), you may be able to refinance the home with a mortgage of your own, with much less strict credit history requirements.
Note: Please understand that there are various strategies and circumstances within your personal financial picture that may make certain house purchasing techniques more favorable than others. In addition, with some of the above mentioned strategies enabling you to purchase a home, obtaining home equity loans and lines of credit may be more difficult and require additional explanation on your part. So, the better you understand what you are doing, the more control you will have over your finances.
Finally, you may also lease with the option to purchase a home(usually called a lease option or lease purchase). With this technique, you will NOT get immediate tax relief, as you are basically renting the house, but at the same time, you have the right to purchase the house (if you want to).
The benefit of a lease option is that you don’t HAVE to buy if you don’t want to…you can have a little time to “test out” the house before committing to the purchase. With a lease purchase, however, you may be required to put down an “option deposit” which gives you the right to buy, and will be used as a down payment against the purchase price should you decide to buy. You will usually lose this option deposit, however, if you decide not purchase the home for some reason.
Similar to the techniques explained above, once you’ve made 6 to 12 months of consecutive, timely, lease option payments (you’ll have to prove this), you may be able to refinance the home with a mortgage of your own, with much less strict credit history requirements. It’s at this time when you’ll begin to gain tax relief!
You’ll also be able to find more detailed explanations of these techniques in my real estate section of this website, coming in the near future…
To Your Success...
David Jesse, Your Fellow Average Joe