Typically, to buy a house you need at least a 620 credit score and at least a 3% down payment. But, you have neither of those, so I’m not even going to write about it. Buying a house with bad credit and no money down is going to be tough. I’m not even going to sugar coat it. You’re considered a very high risk to a bank. In their eyes, the moment they loan you that money, they’ll never see it again. It’ll be the equivalent of tossing it into a fire. Good news is that there are ways to get into a house and with some of these strategies you don’t even have to deal with a bank.
Rent-to-own
With rent-to-own or lease houses, you’re what’s called a tenant-buyer. The owner still legally owns the house and you’re still legally a tenant. You will be a pay refundable deposit to be credited towards the purchase of the house whenever you qualify for a mortgage. Some owners will increase your monthly rent and save to excess to be credited towards your down payment or closing costs.
In the lease, it spells out the terms of when you’re supposed to buy the house and how your money will be used. Typically, you’ll be given a 2-4 year timeframe to buy the house. Some owners will let you extend if you don’t meet the timeline, but you’ll have to pay an extra non-refundable deposit.
It works like this: I have a rent-own-house that you want to buy. I’ll charge you $5,000 and you rent will be $1,800 a month. $100 of that will be saved for you to be used towards your purchase. The term is for 3 years. At the end of the 3 years, you’ll have $8,600. $5,000 will be from the deposit and $3,600 will be from the rent payment.
Owner financing
Owner financing is like a rent-to-own house except you legally own it. You’re not a tenant. Your name is on the deed. With owner financing, some owners will charge a deposit and an interest rate. The term won’t be as long as a real mortgage. You’d be lucky if you get 30 years. You can decide if you want your payments to be calculated as if you had a 30 year term even if your term is shorter. The down side is that you will have big payment at the end called a balloon. The upside, is that a word, is your monthly payments will be lower.
For example, if you get a 15 year mortgage payment on a $200,000 house, your monthly payments would be $1,112. If you get it calculated over 30 years, it would cost you $556 a month, but your last payment would be $100,555. Ouch!!
Subject to
You could find a homeowner who doesn’t want their house anymore and buy it subject to the existing mortgage. Ok, you don’t speak real estate geek talk; fine. Subject to means transferring the deed in your name, making the monthly payments, and leaving the mortgage in the original owner’s name. The house is legally yours, but financially it’s the original owner’s responsibility. If you stop making the payments, your credit score won’t be impacted; theirs will be.
I know you’re probably thinking “who in their right mind would agree to this risk?” The answer: more owners than you think. Generally, the types of people that would do this are having a hard time paying their mortgage, have a raggedy house, owe more than what the house is worth, or will have to pay a lot of money at closing if they sold.
Disclaimer: banks have what is called a due on sale clause. It means if the deed is transferred without their permission, they can ask for the full balance to be paid at one time. If you don’t pay it, they can foreclose on the house. I’ve never heard of the bank actually exercising that right. But keep that in mind.
Someone else
This option will without a doubt be the hardest. Find someone to buy the house for you and let you live there. You could pay the mortgage and keep the deed in their name or use the subject to method mentioned above. Make sure you have a signed document stating the house goes to you if anything happens to them.
The person you pick will have to love you enough to look past your issues and also be willing to take on that extra debt. Not too many people would agree this. I can’t name one person who would do this for me. I either know all broke people or they don’t love me enough. If you’re in a serious relationship or married, this is a great option.
Quick tip: in community property states like Texas, even though you aren’t on the deed, half of the house is still yours.
Conclusion
Get in your car, drive around neighborhoods and look for abandoned houses or houses with a rent-to-own in the yard. Write down the addresses and find way to contact the owners. A good first step is to check out the tax assessor’s website to see whose name is on the tax records. Either send them a letter or call them.
With these alternative ways of buying a house, it’s going to do a lot more legwork upfront for you; but if you don’t have any money or have bad credit, you’re going have to work for it. There’s no way around it. Which of the options do you think you would be able to do?
To be honest, I don’t like rent to own houses because there’s a lot of scams with them. Owners will purposely “qualify” tenant-buyers who have no chance on Earth of ever getting a mortgage. They’ll take your rent-to-own nonrefundable deposit and at the end of the term when you don’t get a mortgage, they will kick you out and replace you with another helpless buyer. It’s a money mill to them; rinse and repeat