“What is your credit score?” That was the questionone of my best friends asked me at lunch a few weeks ago.
After the six of us at the table shared our FICO (Fair IsaacCorp.) scores, my friend proceeded to tell us how one of his former apartmenttenants just bought a condo even though his FICO score is only about 600.
Purchase Bob Bruss reports online.
The rest of us were very surprised. Then we realized, todaythere is a home loan for virtually everybody who has a decent job and who wantsto own a home, regardless of their credit.
CHECK YOUR CREDIT BEFORE SHOPPING FOR A HOME. As savvyhome buyers and their real estate buyer’s agents know, it’s smart to check yourcredit reports before shopping for a home. Fix any errors before applying for amortgage so you will get the best possible interest rate and terms.
Although you can obtain one free credit report each yearfrom each of the three nationwide credit bureaus, Experian, Equifax and TransUnion, at www.annualcreditreport.com,that source will not provide your all-important FICO score, which most mortgagelenders use to qualify applicants.
Today’s mortgage lenders look primarily at your FICO scorewhen qualifying borrowers. In fact, I’m told most mortgage underwriters don’teven read the applicant’s credit reports if the FICO score is at least 680.
FICO scores are based on (1) the length of your credithistory (the longer the better), (2) the percentage of available total creditcurrently being used (try to stay below 50 percent), and (3) your on-timepayment 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 threecredit reports is at www.myfico.com. Forabout $45, you can instantly receive this important information. Then studyyour credit reports and follow the instructions to correct any errors.
Each credit bureau has 30 days to “verify” anyincorrect information. If the creditor doesn’t verify the information, such asa 30-day late payment, then it must be removed from your credit report. Theresult should be an improved FICO score. Ask each credit bureau to send you acorrected copy of your credit report after 30 days.
GET PRE-APPROVED FOR A MORTGAGE. Afteryou’ve checked your credit reports, corrected any errors in those reports, andobtained 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 actualmortgage lender. If your FICO score is below 620, look for a mortgage lenderspecializing 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’slargest home loan lender, but also the nation’s largest subprime lender to homebuyers with low FICO scores.
Be sure you obtain a pre-approval letter from an actuallender, not just a so-called “pre-qualification letter” from amortgage broker. A pre-qualification letter means: “We think you can get amortgage but we haven’t checked out your loan application yet.” If youhave a low FICO score, a mortgage broker can obtain a pre-approval certificatefrom a lender who specializes in low FICO score mortgages.
Most mortgage lenders do not charge for pre-approvalcertificates. They know once you have their pre-approval, you aren’t likely toshop 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 mortgagepre-approval is then you know what price range home you can afford and themaximum mortgage available.
DON’T LET LACK OF CASH STOP YOUR HOME PURCHASE. If youare “cash challenged” without much down-payment cash, don’t let thatstop you from buying a home. In today’s “buyer’s market” for housesand condos, meaning there are more residences listed for sale than there arequalified buyers, sellers and lenders are becoming very flexible in their questto make sales.
Prospective home buyers who have good income and goodcredit, but little cash, should consider 100 percent “nothing down”mortgages. Some lenders even offer 103 and 107 percent mortgages to includeclosing costs in the mortgage amount. FHA and VA mortgages also offer low- andzero-down-payment alternatives.
However, the monthly payments on low-down-payment loans canbe high. But home buyers who plan to fix up their home purchases to increasethe market value might want to proceed anyway and then refinance in a year ortwo. Just be sure the mortgage doesn’t contain any prepayment penalty.
Whenever possible, low- or zero-down-payment home buyersshould avoid PMI (private mortgage insurance) mortgages. PMI premiums, whichcost $100 or more per month, protect the lender if the borrower defaults. ButPMI premiums are not tax deductible.
A better alternative to PMI is to obtain a first mortgage of80 percent or lower, and a seller carryback mortgage or a home equity loan forthe 20 percent balance of the purchase price, thus avoiding PMI premiums.
ALTERNATIVES TO OBTAINING A NEW MORTGAGE. If youhave really bad credit, or just don’t want to jump through a mortgage lender’s100 flaming hoops, there are alternatives so you can still buy a house orcondo, perhaps while you improve your income and credit situation.
My personal favorite (not that I have bad credit) is thelease with option to buy. I’ve used this method many times over the last 25years to buy and sell houses, including my current personal residence.
Although a few lease-options are advertised in newspaperclassified ads, most are created by asking a landlord, “If I lease thishouse (or condo), will you give me an option to buy it?” Because manylandlords would prefer to sell, they will gladly agree to a lease-option with apartial rent credit, such as 33 percent, toward the purchase price.
Another alternative to obtaining a new mortgage is to offerto buy a home “subject to” its existing mortgage. Many of theseresidences are advertised as “assume existing mortgage” or “takeover mortgage payments.” However, buyers should be careful that the homeis 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 toask the seller to carry back a first or second mortgage secured by the home. Myexperience has been retirees are especially eager to do this to provide secureretirement income. In today’s market, offering the home seller a 6 percentinterest rate is a “good deal” for both the seller and the buyer.
SUMMARY: Even if you have bad credit, or are “cashchallenged” for a down payment, there are many ways to buy a house orcondo in today’s buyer’s market by following the recommendations above. Moredetails are in my new special report, “Five Easy Ways to Buy Your Home andInvestment 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 orinstant Internet delivery at www.BobBruss.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News