Resources For Buyers and Sellers

How to Buy Your Next Home Even If You Don't Have Perfect Credit
A special report from Real Estate Expert Bob Bruss

You don’t need good credit to buy your next home. If you don’t remember anything else from this report, please remember that fact which was the real message of a letter I received a few weeks ago from a Florida home seller. She was having trouble selling her house the way she wanted to sell it. Although she said it was listed for sale with a local Realtor in the MLS (multiple listing service), was in good condition in a good location, and priced at market value, she encountered difficulty getting buyers to make the purchase offer she wanted.

This savvy retired homeowner wanted to sell her free and clear home so she could afford to move to a luxury assisted-living residence where some of her friends live. But she didn’t want an all-cash sale (as most home sellers seek). Instead, she wanted a 15% cash down payment and insisted on carrying back an 85% first mortgage which would provide her with $2,400 per month payments for 25 years (more than her life expectancy!). Although she didn’t include the home’s market value or the interest rate she wanted, I presume she was competitive. The house had been listed for sale almost three months! But she wrote that most of her buyers want to pay all-cash! She asked if she had to accept an all-cash purchase offer. The obvious answer is “no.”

A property seller can specify the sales price and terms they want. This smart home seller figured out there is no other place she could earn around 6% interest today with safety other than a mortgage secured by her former residence. Why couldn’t she or her Realtor find a buyer willing to pay a 15% cash down payment so she could finance the home buyer’s purchase to give her the monthly income she needed? Maybe that home wasn’t being properly marketed. In most communities, a home advertised for sale with “seller financing” will sell almost instantly.

My point is there are home sellers who don’t need or want an all-cash sale – you don’t need a perfect credit report with no blemishes to buy their home with seller financing. Yes, home sellers should always insist on seeing the buyer’s credit reports – but many sellers and mortgage lenders are not as tough as buyers think. As my mortgage broker friend, Dean, has told me several times “Even a bankrupt arsonist can finance a home purchase today!” Not every house or condo can be purchased with seller financing, or if you have bad credit – but all you need is one!

SELLER FINANCING HAS BECOME RARE – UNTIL THE BUYER SHOWS THE SELLER THE ADVANTAGES. Most home sellers are not as smart as that Florida home seller. Realty agents who have been selling real estate less than 10 years don’t remember “the good old days” when home sellers often carried back first and second mortgages for their buyers. Novice realty agents with less than 10 years sales experience think there is only one way to finance a home sale – all-cash with a new first mortgage. But, as we will see, there are many ways to finance property sales, especially if your credit is less than perfect.

In his great new book, Building Wealth One House at a Time (McGraw-Hill, New York, 2005, $18.95), successful investor John Schaub reveals “I have never borrowed money from a bank to buy a property.” He has been buying single-family houses as investments for over 30 years! Although Schaub has excellent credit, he wisely chooses to buy either with home seller financing (meaning the seller carries back a first or second mortgage for the buyer) or by taking over existing financing on a property. Home buyers with less than perfect credit can do likewise.

As an investor in rental houses, I’ve lost track of all the houses I bought with seller financing after the listing agent told me the seller needed an all-cash sale. Later, we will look at the methods of buying without getting a new “hard money” loan from a bank or mortgage banker.

But I hasten to emphasize not every house or condo can be purchased if you have less than perfect credit. Many home sellers need all-cash sales, especially when they have a small equity or they need cash for the down payment on their next home. But we will look at the situations where the home can be purchased if the buyer doesn’t have perfect credit.

Today’s mortgage lenders can finance just about any home buyer – even those with bad credit. However, it can be very expensive with high interest rates and the dreaded PMI (private mortgage insurance) premiums unless you know how to avoid those drawbacks. For more details, please read my special report “Secrets of Buying Your Home or Investment Property for Nothing Down.” To avoid high-cost borrowing, just convince the seller to carry back a first or second mortgage. More about the best candidates for seller financing later. Now let’s discuss the basics.

START BY CHECKING YOUR THREE CREDIT REPORTS. My extensive “research” for this report included obtaining my current credit reports from the three nationwide credit bureaus – Experian, Trans Union, and Equifax – plus obtaining my FICO (Fair, Isaac and Co.) scores from these three credit bureaus. I invested $44.95 on the Internet at www.myfico.com for this information. I could have purchased just one credit report there for $14.95, including my FICO score, but it would not have been complete. Most mortgage lenders obtain a 3-in-1 combined credit report on prospective borrowers so I checked all three of my credit reports.

Each credit bureau had different information and a different FICO score. Not all credit card companies, department stores, banks, and other creditors report your credit activity to all three credit bureaus. Some creditors don’t report your credit history to any credit bureau, presumably because they want to keep your good (or bad) credit to themselves. This can hurt if you are trying to establish credit but your credit card company, department store, or gasoline company doesn’t report your on-time payments.

To my surprise, my FICO scores from the three credit bureaus vary significantly. Trans Union says my FICO score is 769. Equifax reports my 771 FICO score. But Experian calculated a 799 FICO score. Each FICO credit report included my strong credit points and my weak points.

Ironically, Experian where I had the best credit score made the worst comments about me: “The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high. The amount owed on your accounts is too high.” But my Equifax report emphasized “You have no late payments reported on your credit accounts, you demonstrate a relatively long credit history, and you have a low proportion of balances to credit limits (high credit) on your revolving/charge accounts.” Equifax added “You have too few/too many accounts being reported on your file (I have 33 credit accounts, most with zero balances, whereas average U.S. consumers have 11 current credit accounts).” Finally, Trans Union said “You have no late payments reported on your credit accounts and you have a low proportion of balances to credit limits (high credit) on your revolving/charge accounts,” but “The amount owed on your accounts is too high.” At least I liked their FICO scores!

FICO says consumers in my score range of 750-799 have a delinquency rate of 2%. But FICO scores below 500 have an 83% default rate, 500-529 shows a 72% delinquency rate, in the 550-599 range there is a 52% probability of delinquency, 600-649 scores show a 31% delinquency rate, and 650-699 have a 15% delinquency rate. Over 700 the delinquency rate drops to 5% up to 749. If your FICO score is 800 or over, you have a 1% delinquency likelihood.

The median FICO score is 723 – meaning an equal number of individuals have FICO scores above and below that number. Most mortgage lenders consider a FICO score above 680 will entitle you to the lowest interest rate. The www.MyFICO.com website provides lots of valuable insights on how to improve your FICO score.

Virtually all creditors now use FICO scores to rate credit and mortgage applications. But each creditor’s criteria vary widely. For example, I understand Home Depot won’t issue its credit card to an applicant with a bankruptcy within the last 10 years. But most other creditors will approve credit if the bankruptcy has been discharged (although the borrower’s interest rate won’t be the lowest).

However, a major FICO flaw is their scores do not consider your income, savings, IRA, and retirement accounts in relationship to your credit. FICO scores only weigh the length of your credit history, on-time payments (even one late payment beyond 30 days hurts FICO scores), number of credit accounts, percentage of balances to available credit, collections, derogatory public records (such as judgments and unpaid property taxes), and number of recent credit inquiries with the past six months.

Before applying for credit, it is very smart to invest, as I did, in your 3-in-1 credit reports and FICO scores. Incidentally, your own personal credit report purchases do NOT show up or count as an “inquiry” which can hurt your FICO score if you have too many inquiries by creditors in the last six months.Although you can go to each credit bureau’s individual website to obtain your credit report and their version of your FICO score, the easiest and best place to obtain all this information is at www.myfico.com. Maybe your credit reports and FICO scores are better than you think.

If you find mistakes which are hurting your FICO score, each credit bureau includes either an online, telephone, or mail procedure to correct the errors. Be sure to follow up because the credit bureaus are not famous for great customer service! After you register an error, by federal law each credit bureau has 30 days to either verify their information is correct or remove unverified information. Ask for a free corrected copy of your credit report after the error is removed.

EXAMPLE: Several years ago, I sold a rental house at about the same time the property taxes were due. The title company was supposed to pay my property taxes so title could be delivered to the buyer free of any unpaid property taxes. But the title company failed to pay the property taxes! After a few months, the unpaid property taxes showed up on my credit reports. When I asked the title company to take care of the problem, they argued the property taxes were paid. But the local tax collector insisted they were unpaid. Eventually, the title company paid the property taxes, plus the 10% penalty for late payment. Then I had to get those unpaid property taxes removed from my credit reports. If I had been applying for a mortgage or other credit, that delay of several months to clean up my credit reports would have meant I probably couldn’t get a mortgage.

Before leaving the topic of credit reports, I hasten to add everyone, by the end of 2005, will be entitled to one free credit report from each of the three nationwide credit bureaus – Trans Union, Experian, and Equifax. So far, only residents of the western and midwestern states can use this new program. But, for many years, by state law the residents of Colorado, Georgia, Maryland, Massachusetts, and Vermont have been entitled to one free credit report each year from each credit bureau. To obtain your free credit report from any of the three credit bureaus (but not including your very important FICO score), go to www.AnnualCreditReport.com or phone 1-877-322-8228.

HOW TO BUILD OR REPAIR YOUR CREDIT. Don’t go to those “credit repair” firms, most of which are high-priced scams. But many large cities have non-profit free or very low cost consumer credit counseling agencies which can be very helpful to clean up your credit problems.

If you have no credit, force yourself to start building credit. To illustrate, years ago, my dad did that. He and mom were in the habit of paying cash for everything, including the house where I grew up. Yes, mom had department store charge cards, but I remember dad’s banker talked him into financing the purchase of a new car to build up his credit. That was a “big deal” around our house. But after about six months, dad hated those monthly car payments so much he paid off that auto loan. However, by then he had started building his credit file. The only major purchase I recall mom and dad buying on credit after that was when they were in their 70s and they bought their condo with a 10% down payment and a 90% 30-year mortgage (it was one of the rare times they listened to my advice!). Years later, mom (who was the shrewd investor in our family) thanked me for “forcing” the low down payment purchase of their condo which, dollar for dollar, was the best investment my parents ever made.

The easiest places to get credit cards if you have no credit file are usually gasoline companies and department stores. If you buy a car, finance it – but be sure there is no prepayment penalty if you want to pay off the car loan in a few months – and be sure you finance with a major lender who reports to the credit bureaus. It does no good, for example, to finance your auto purchase at Jake’s Used Cars if Jake carries the paper himself and doesn’t report to the credit bureaus. Watch out for auto loans that have stiff prepayment penalties. Don’t take the dealer’s word for this – read the fine print about prepayment before signing the auto finance contract.

If you filed bankruptcy, start rebuilding your credit as soon as you are “discharged” from bankruptcy court jurisdiction.If you filed Chapter 7 bankruptcy and were discharged from all or most of your debts (except secured debts, such as a real estate mortgage), be sure to pay all your obligations on time from now on.

Chapter 7 bankruptcy offers a “fresh start.” But that bankruptcy will remain on your credit reports for 10 years. As I write this, Congress is considering a plan to toughen the federal bankruptcy laws, so watch for changes. If you are thinking about filing Chapter 7, my best advice is try to avoid doing so unless you have no other recourse. Although Chapter 7 wipes out most of your debts, lenders and credit grantors will be very hesitant to approve you for future credit.

Because you cannot file Chapter 7 bankruptcy again for at least seven years, some mortgage lenders will approve your application as soon as 12 months after your Chapter 7 bankruptcy discharge. However, you won’t get the lowest interest rate! Also, mortgages are secured by the real property so mortgage lenders will eventually get their money, even if you again file bankruptcy in the future.

But Chapter 13 bankruptcy, often called the “wage earner reorganization plan,” is different. When an individual files Chapter 13, he or she submits a plan to the U.S. Bankruptcy Court to repay unsecured debts over as long as 60 months. But secured debts, such as mortgages, remain secured by the property.

If a Chapter 13 debtor doesn’t keep up payments on secured debts, plus paying the unpaid arrearages as agreed in their wage earner plan, the mortgage lender can get relief from the bankruptcy “automatic stay” and foreclose on the property. Filing Chapter 13 bankruptcy often delays foreclosure loss of the property but foreclosure loss of the property won’t be avoided if the debtor doesn’t keep up the payments. Having both a bankruptcy filing and a foreclosure loss on your credit report is definitely not good!

Mortgage lenders will not loan to debtors who are still in Chapter 7 or 13 bankruptcy. The reason is the bankruptcy judge’s approval is required for the debtor to take on new debt, such as a home mortgage. Also, bankruptcy court approval is required to sell a property while the debtor is in Chapter 7 or 13. However, after discharge from Chapter 13 bankruptcy, there are many mortgage lenders who are willing to make new loans – but not at the lowest interest rate.

Filing Chapter 11 bankruptcy is very similar to Chapter 13 except Chapter 11 is for business bankruptcy. To illustrate, as I write this, U.S. Airways and United Airlines are in Chapter 11 business bankruptcy reorganization to obtain relief from their creditors and to reorganize their finances.

Chapter 11 business bankruptcy is not the stigma it used to be. I know several small business owners who filed Chapter 11 business bankruptcy reorganization and are now doing just fine, much financially stronger than before filing. Whether you consider Chapter 7, 11, or 13 bankruptcy, please consult several bankruptcy attorneys before proceeding because your credit will be at least temporarily ruined.

THE TOP 10 REASONS MORTGAGE APPLICANTS ARE “DECLINED.” Just one negative item on your credit report, such as being over 30 days late with a payment which is reported to the credit bureaus, can cause either rejection of a mortgage application, or loan approval at an above-market interest rate.

The primary reasons applicants are “declined” for mortgages include (1) no credit file (usually because the applicant pays cash and has little or no established credit); (2) insufficient information in the applicant’s credit file; (3) insufficient income; (4) short time on the job – at least two years in the same field are usually required by most lenders; (5) slow pay and/or poor credit history indicated by a low FICO score; (6) judgments, garnishments, liens, or past bankruptcy; (7) accounts sent to collection agencies; (8) current bankruptcy which is not discharged; (9) foreclosure; and (10) repossession (usually an automobile or furniture). No credit or insufficient credit can often be overcome, such as by showing timely payment of rent and utilities. But the other reasons for “decline” are usually more difficult.

However, I must hasten to add there are some mortgage lenders who will approve loans to applicants who have these “credit challenges.” But such lenders will charge high interest rates to compensate for their very high risks.

DON’T CO-SIGN OR GUARANTEE ANOTHER PERSON’S CREDIT. If you are asked to co-sign or guarantee another person’s loan, please don’t do it except for a person you 100% trust. All the credit obligations co-signed or guaranteed by you will appear on your credit reports. If the primary obligor fails to pay, or pays late, the non-payment or late payment will show up on your credit reports and your credit rating will be adversely affected. You will also be expected to pay if the primary debtor doesn’t pay! Even if you pay, but the payment is late, your FICO score will be harmed.

Also, if you let someone take over your debt obligation, unless the creditor gives you a written release of liability, you still remain liable and the obligation will continue to show up on your credit report. If you are buying a home, for example, and you agree to take over the existing mortgage already on that property, that mortgage will still show up on the home seller’s credit report unless the lender provided a written release of liability. As the home buyer, you probably don’t care. But if you are the home seller, be sure to get a written release of liability just in case the buyer doesn’t make the mortgage payments on time.

EXAMPLE: A few years ago, I sold a three-unit building to my good friend Art for nothing down. Art took over the payments on its existing mortgage of several hundred thousand dollars. Fortunately, Art has great income and great credit. He paid every mortgage payment on time. However, that mortgage still showed up on my credit reports until Art eventually sold that property and the mortgage was paid in full. Because of Art’s on-time monthly mortgage payments, my credit history was strengthened. However, if Art was a deadbeat, my credit scores would have been adversely affected.

No matter how much you love the person who requests your help with co-signing or a guarantee, please realize if that person doesn’t pay, your credit will be harmed and you will be expected to pay. It’s great if you want to help your son or daughter buy a home; just be sure they will pay on time because if they don’t, your credit will be hurt.

WHICH TYPE OF HOME FINANCING IS BEST IF YOU ARE “CREDIT CHALLENGED?” Now that you’ve checked your credit reports and FICO scores from the three nationwide credit bureaus, it’s time to consider the best ways to finance your house or condo purchase. Let’s discuss specific home purchase finance methods whether or not you have good credit.

1 – GET PRE-APPROVED IN WRITING FOR A HOME LOAN. Unless your FICO score is below 600, if you have adequate income you can probably get a home mortgage. FHA and VA home loans are usually the easiest to obtain with the most liberal qualification rules.

Traditionally, mortgage lenders wouldn’t approve home loans if the monthly housing payment took more than 28% to 33% of monthly household income. But in recent years, lenders have greatly liberalized their standards. I’ve seen home loans approved recently which take up to 40%, and even 50%, of monthly household income if the borrower(s) has a high FICO score, stable income, and little or no other debt.

Today, there is a lender for almost every potential home buyer. “A-paper” is the term mortgage lenders use for their best borrowers, typically those with FICO scores above 680 or 700. “B-paper” and even C-paper and D-paper means the borrower has “credit challenges” and the lender’s risk is higher so the interest rate will be above competitive market interest rates.

To learn what home mortgage you can obtain, it’s best to get pre-approved in writing by one lender before you start shopping for a home. Most lenders do not charge for mortgage pre-approvals. If there is a charge, such as $200, make sure it will be credited against loan fees when you actually take out the mortgage. After you are pre-approved with one lender, you can still keep shopping among other lenders to see if you can improve on the first lender’s pre-approval mortgage terms.

However, please don’t confuse “pre-approval” with “pre-qualification” which means only the lender thinks you can qualify based on the information you provide. PRE-QUALIFICATION IS WORTHLESS! But a written mortgage pre-approval letter or certificate comes from an actual lender, such as a bank or mortgage banker, after you fill out a written loan application which is then verified before the actual lender issues a pre-approval up to a specified maximum mortgage amount. Although mortgage brokers can arrange your mortgage pre-approval, since they are not actual lenders loaning their own funds, they cannot issue written pre-approvals. Here are the types of lenders to consider for your pre-approval:

A – Mortgage brokers are “middlepersons” between borrowers and lenders. Ask how long the mortgage broker has been in business. If it is not at least five years, I suggest you keep shopping for a more experienced mortgage broker. There are many great mortgage brokers who can arrange “impossible loans” for difficult situations.

But I’ve encountered too many mortgage brokers who are “bait and switch” con-men (and women) who will promise almost anything to get written loan applications from prospective borrowers which can then be “shopped” by the mortgage broker among many lenders. Until a mortgage broker has a written loan application, he or she has nothing to shop among actual mortgage lenders.

However, I’ve had very good experiences with other mortgage brokers who are honest and reputable. The big advantage offered by mortgage brokers is they have contacts with dozens, sometimes hundreds, of out-of-area lenders so they can match you with the best lender for your situation. Especially if you are “credit challenged,” a mortgage broker might be your best bet to obtain a lender’s pre-approval letter. Wherever you obtain a written pre-approval, be sure it contains a specific expiration date, usually 60 to 30 days. Also, ask about interest rate lock-ins in a rising interest rate market.

As with any lender, be sure to obtain in writing a list of loan fees you will be asked to pay when the mortgage broker arranges a home loan for you. Please be aware mortgage brokers (and some other lenders too) earn their fees from three possible sources: (1) a loan fee, such as one or two points (each “point” equals 1% of the amount borrowed), paid by the borrower (or sometimes the home seller, if the seller agrees to do so as a sales incentive); (2) a “yield spread premium” which the actual lender pays to the mortgage broker (or to a mortgage banker) for producing a slightly higher than market interest rate mortgage (such as a home loan at 6.25% when the “going rate” is 6%); and (3) add-on junk or garbage fees, which are 100% lender’s profit and are not for specific services (names of these negotiable fees include origination fee, processing fee, documentation fee, warehousing fee, underwriting fee, and (when the lender runs out of names) miscellaneous fee).

Please don’t confuse these negotiable junk or garbage fees with fees to third parties for actual services rendered, such as appraisal fee, title insurance fee, FedEx courier fee, credit report fee, and escrow or attorney fees. A trick some lenders play is they charge 100% pure profit markups on third party fees, such as charging $450 for an appraisal which only costs the lender $350. Wells Fargo Mortgage recently lost a big U.S. Court of Appeals case regarding their illegal markups on third party fees. At this moment, based on the U.S. Court of Appeal decisions in different parts of the nation, such markups are legal in some states and illegal in other states.

A special advantage of some mortgage brokers is they often have contacts with wealthy individual lenders who loan mortgage money without checking the borrower’s credit or income. But these interest rates and loan fees are not cheap! If you only need mortgage money for a short time, such as one to five years, these “hard money” mortgage brokers who don’t ask many questions can be worthwhile. You will usually find these “hard money loan” specialists advertising in the weekend newspaper classified ads under “real estate loans” or in the phone book yellow pages.

B – Banks, credit unions, and savings banks are direct lenders of their own funds. The advantage of working with these lenders is they are loaning their own funds so there is no middleperson. But their loan officers are usually on a salary plus bonus or commission so they are really salespeople. However, a disadvantage is these lenders only offer their own loan programs and they might not have a loan plan for your situation, especially if you have credit problems.

Today, these lenders have about 40% of the home mortgage market, way down from prior years. Although they originate the home loans, these lenders often immediately sell these mortgages in the secondary mortgage market to Fannie Mae or Freddie Mac so they can obtain more funds to loan to other borrowers.

When the lender keeps the mortgage, it is called a “portfolio loan.” Portfolio lenders are often more flexible than lenders who sell all their mortgages. By the way, these originating lenders frequently keep the highly-profitable loan servicing (which pays ¼% annual interest to the loan servicer) so the borrower often doesn’t know the loan has been sold. These lenders can issue pre-approvals direct to borrowers, or through mortgage brokers.

C – Mortgage bankers loan their own funds but quickly sell the new loans in the secondary mortgage market. Major mortgage lenders such as Countrywide, Home Side Lending, and Wells Fargo Mortgage are mortgage bankers who originate home loans with their own funds and then quickly sell them into the secondary mortgage market. Because these lenders prefer to keep the loan servicing to earn that ¼% servicing fee, borrowers usually never learn who really owns their home mortgage. Mortgage banks can issue pre-approvals direct to borrowers, or through mortgage brokers.

2 – HOME SELLER CARRY-BACK MORTGAGE. Armed with a pre-approval letter or certificate from an actual lender (not from a mortgage broker, although the mortgage broker can arrange such a pre-approval), you’re ready to shop for your next house or condo. The mortgage pre-approval gives the home shopper a feeling of confidence, although you might not need that pre-approval to buy the home you select.

In the right circumstances, you will be better off buying a home whose seller will carry back the mortgage financing for you. With seller financing, there is no loan application, no credit check (some sellers and their realty agents wisely suggest a credit check so be sure to disclose any credit problems up front!), no long wait for mortgage approval by unreasonable lenders, no appraisal, no extra loan costs, and the buyer (that’s you!) gets to specify the mortgage terms you want (such as 6% interest, 30-year mortgage term, etc.) in your purchase offer for the home. If the home seller doesn’t like the seller carry-back mortgage terms you offered, the seller can counteroffer with acceptable terms which you can then either accept or decline.

Having bought many homes with seller carry-back financing, I’ve learned the best candidates for seller financing are homes which (a) have been listed for sale at least 60 days, (b) are vacant, (c) are free and clear, and/or (d) are being sold by retirees who don’t need immediate all-cash, but want increased retirement income with safety, such as a mortgage secured by their former residence. Personally, when I get old and feeble, this is the way I plan to sell my home in about 30 years!

3 – TAKE OVER AN EXISTING MORTGAGE. Closely related to seller financing, taking over an existing mortgage already secured by the home usually avoids the hassles of getting a new home mortgage. There are two primary methods:

A – Purchase the home “subject to” its existing mortgage. This method works especially well with a highly-motivated seller who doesn’t have much equity in the home. “Take over payments” is often advertised by the motivated seller (or the motivated real estate agent!). If the home is in the foreclosure process, that is an especially good time to use this technique to quickly cure the default. For more details, please my special report “Pros and Cons of Earning Big Profits from Foreclosures and Bargain Distress Properties.”

As the buyer, this method has virtually no risk for you. However, as explained earlier, there is a risk for the seller because, if the buyer defaults, that default shows up on the seller’s credit report but not on the buyer’s credit report. Like seller financing, no credit check is usually required.

However, most existing mortgages contain “due on sale” clauses, That means when the property title transfers, with limited exceptions such as for transfers to spouses, family heirs who live in the home, and into trusts, the lender could call the loan due in full. The way most lenders learn of the title transfer to a new owner is when the name on the fire or homeowner’s insurance policy is changed. To avoid calling the lender’s attention to the title transfer, you might want to take over the old fire or homeowner’s insurance policy and add your name to the existing policy as an additional insured.

Only once can I recall having a lender try to enforce the “due on sale” clause when I purchased “subject to” the existing mortgage. Most lenders will then allow the existing mortgage to be assumed by the buyer, in return for an assumption fee of 1% or 2% of the loan balance. Or, after taking title to the property, the new owner can refinance the home with another lender to pay off the old lender who tried to enforce the due on sale clause.

B – Formally assume the existing mortgage. The other method of taking over an existing mortgage is to assume its legal obligation. Home sellers should insist on being released by the lender from further liability after the buyer assumes the existing mortgage. But that’s the home seller’s problem, not yours. My experience has been most lenders will allow assumption of an existing mortgage by buyers with good credit upon the payment of a 1% or 2% assumption fee.

Unless your seller insists you formally assume the existing mortgage, I prefer to take title “subject to” the existing mortgage. I’ve found after holding the title, I’m in a “power position” with the lender. Before purchase, if you ask the existing lender to assume the mortgage, the lender will usually try to extract lots of fees from the buyer. Most mortgage lenders prefer to write a new mortgage for the new owner instead of allowing an assumption. But after the buyer holds title, the lender doesn’t have so much power. Of course, always make the monthly mortgage payments on time!

4 – BUY A HOME WITH A LEASE-OPTION WHILE CLEANING UP YOUR CREDIT. If you have really bad credit, you just plan to keep the home for a short time (such as while you renovate it before selling at a quick profit – called “flipping”), or you don’t want to deal with mortgage lenders until you clean up your credit and improve your FICO score, consider a lease with option to purchase.

Although I am not “credit challenged,” the lease-option is still my favorite method to buy and sell homes. It requires very little up-front cash, yet it gives the buyer-tenant control of the property and benefits from the probable future market value appreciation. Leasing is almost always far cheaper than holding title.

Lease-options won’t work on every home, but as interest rates gradually rise and home mortgages become less easily available, lease-options usually become more acceptable to sellers Details, especially how to find and create lease-options, are in my special report “How to Profitably Use a Lease-Option to Buy or Sell Your Home or Investment Property.”

FOR MORE INFORMATION. Nobody has perfect credit. Building or improving your credit and FICO scores is a never-ending task. To learn more about how to buy your next home, even if you are “credit challenged” and have less than perfect credit, more information is available in these excellent books: Investing in Real Estate With Other People’s Money by Jack Cummings; Secrets of Buying and Selling Real Estate Without Using Your Own Money by Robert Shemin; and The Weekend Millionaire’s Secrets to Investing in Real Estate by Mike Summey and Roger Dawson. All these recent books are available in stock or by special order at local bookstores, public libraries, and www.amazon.com.

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