How to Buy or Refinance Property with a Diminished Credit History

As a former banker, it continues to perplex me how the sub-prime fiasco ever came about; the lax credit standards and criteria that the banks and lenders exhibited …

As a former banker, it continues to perplex me how the sub-prime fiasco ever came about; the lax credit standards and criteria that the banks and lenders exhibited fly in the face of fiscal responsibility and accountability. While many of those financial institutions suffered their own losses, it was far worse for the individual borrower. Many individuals with already poor credit or no credit history at all, were able, under those relaxed criteria, to obtain financing for home loans. Now that the banks and mortgage lenders are experiencing a liquidity crisis, resulting in higher interest rates and tightening consumer home equity lines of credit, many consumers are finding themselves in a worse predicament than before.

Does that mean that as a home buyer wannabe that they’re destined to live out their lives as a tenant? Does it mean that, in the case of real estate speculators that they’ve purchased their last investment property? Not at all. What it does mean is that they will have to take a proactive role in re-creating or re-building their diminished credit profile and perceived creditworthiness.

Evaluate your FICO credit score

The most important tool available to assess your credit worthiness is your FICO credit score. This record is invaluable to you, but it is often riddled with errors. Obtain your free copy from the credit reporting agencies as often as permitted, and follow the instructions to dispute any items you believe are wrong.  Lenders are now requiring credit scores of 620 or better (out of 850) for certain types of loans.

Improve your credit score

If the report is factually correct, but your credit score is below 620 you need to work at improving it. How? Pay your installment loans and monthly credit card bills on time (and well in advance of the due date), and for more than just the minimum payment due. Don’t apply for any additional credit cards. To that end, you can “opt-out” of those unsolicited credit card and loan applications; credit card companies regularly check your credit history before they issue an invitation—in the eyes of a lender, those “checks” by the credit card companies are a bad sign, whether or not you initiated them.

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Seek credit counseling

Prospective homeowners could consider credit counseling, which will assist you in consolidating your personal debt and streamline expenses; an action which will be reported to the credit reporting companies, and which lenders view favorably.

Consider seller-financing

Ask the seller if they’ll finance the note; in effect, they become the lender of record, and you pay them directly. Although not all sellers are financially sound enough to be able to do this, it doesn’t hurt to ask. The interest rate may or may not be better than what you’d get from a conventional lender, but on the plus side, they may be more flexible with the down payment and financing terms.

Make a large down payment

Do what it takes: Beg or borrow (no, do not steal) the money for a sizeable down payment. Lenders will be more likely to approve a loan with a 15% or 20% down payment, than a loan that is more than 90% financed. If your private financing source has sufficient money to provide you with a down payment, why not ask if they can finance the entire property for you.

Enlist the help of a co-signer

Get a co-borrower (obviously you need one with good credit) to co-sign the loan with you. Banks and lenders like to know that there is someone that can go after, should the loan default.

Look at Option to Buy Agreements

Seek out home owners who have their own financial woes. As a result of higher adjustable interest rates, many home owners are in jeopardy of losing their own properties. With an Option to Buy Agreement, you and the distressed homeowner can scratch each other’s back, so to speak. The homeowner can give you an Option to Buy Agreement stating that at a predetermined date, you will have the exclusive option to purchase the property, at a predetermined price; in the interim, you will live in the property and pay the rent, ensuring that the homeowner does not default on the loan.

Don’t give up

It may take some vigilance on your part, and a fair amount of time (at least a full year) to benefit from your efforts, but if the result allows you live the typical “American Dream” (or at least your personal version of it), then the hard work is worth it.

 

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