Is it possible to buy a home in California when you have bad credit?
Yes, a good credit history is definitely an important part of financing any purchase – whether it’s a big screen TV, a new car, or a house.
But credit is not the only thing that lenders consider when making a loan to a home buyer. Your down payment, income history, and cash in the bank are other strong factors that can make up for your lower credit rating.
Then why is it that so many people don’t bother to learn about their options to purchase a home?
In my experience, one of the most common reasons is that you will just assume that you can’t qualify for any type of loan because you don’t have a perfect credit history.
In this article I will clarify the common doubts and assumptions you may have about what’s actually possible for buying a home with bad credit. And it all begins with getting good information…
The Home Buying Process Begins With Education
It doesn’t matter if you are a first-time home buyer, second-time buyer, or you’ve recently lost a home through a short sale or foreclosure.
Have you recently gone through a bankruptcy? No problem.
The good news is that there are ways to buy a home under these situations. Yet it all begins with taking the first step towards getting the straight-forward answers to your biggest questions and concerns.
That’s why we offer so much free information for you on PrivateMoneyBlog.com.
We realize that you probably have other important commitments in your life and family that need your attention. You can always come back and refer to our site for ongoing real estate and lending education. You can also subscribe to receive email updates so you can stay current on all the new articles.
We also know that it can be intimidating to call a mortgage lender or real estate agent to find out about your options when you simply don’t know the right types of questions to ask in the first place.
Therefore, the more you learn about financing and real estate, the better you’ll be prepared to speak with someone when you are actually ready to get pre-qualified for your loan.
If this makes sense to you, let’s move on. I have some great stuff to share with you.
5 Ways to Purchase a Property When You Have Bad Credit
1. All cash
All cash means all cash. This is as simple as it gets. If you have enough money available to pay for the price of the home plus closing costs, taxes, and insurance, you got yourself a deal.
You don’t need any type of loan to finance the purchase, so your personal credit history does not even matter.
Now that homes values are going up, there are more and more people buying properties all cash. They can make aggressive offers and close the deals quicker than someone who needs to get a loan. Cash offers are also very attractive to sellers.
Buying a home with all cash sounds great, but not everyone has that kind of money to burn a hole in their pocket. If you’re like most people, you will probably need some sort of financing (loan) to get into your new home.
Here are some options below.
2. Seller financing
Seller financing is a loan that is provided directly by the seller of the property. A seller financing transaction would happen when you make a down payment and also set up a loan agreement with the seller for a certain amount of the home price.
The loan from the seller would have specific financing terms such as the interest rate, loan amount, monthly payments, term, and maturity date. (See the glossary for definitions)
This option is generally possible when the seller does not need to take all of the proceeds from the sale of the property all at once. Instead, the seller can take a portion of their sale proceeds now and spread the rest over time by offering you the loan with monthly payments.
Here is a very basic example:
Rather than take a full $300,000 in cash from the sale of her home, a Seller may choose to take $100,000 cash now and leave the other $200,000 in the form of a loan to you. Therefore, the Seller would also become the lender in that situation.
She gets $100K now and she’ll be paid back the other $200k over time; either when you sell the property or refinance into another type of mortgage loan. Her guarantee for the repayment of the loan is set up by placing a lien on the property until the loan is paid back in full.
3. Lease with an option to buy
A lease with an option to buy is when you lease (rent) a property for a certain period of time and also get an ‘option’ (Opportunity) to purchase the property at the end of your lease. You establish the terms of your lease directly with the owner of the home and also agree in advance to the terms of the purchase.
The terms of the purchase would include the sales price, down payment amount, and any other terms and conditions you both agree upon in writing.
At the end of the lease, you will then have the option to purchase the property or not.
This would be beneficial when you have bad credit as it would let you move into a home now and rent it for a year (or longer) before making the actual purchase. This may give you enough time to build up your savings for a larger down payment or possibly improve your credit so you could qualify for a conventional mortgage loan at the end of your lease.
In other words, it can help you secure a property now and buy you enough time to complete the actual purchase. Who knows? Perhaps the owner of the property would even consider Seller financing!
Note: You would be very wise to hire an experienced licensed real estate agent to help you write the contracts properly.
4. Equity partner
An equity partner can help you purchase a piece of real estate by putting up some of the money in exchange for becoming a part owner. The equity partner would then share in the potential equity build-up over time. Since the partner shares in the ownership of the property, he also shares in the future profits or losses of his investment.
This is different from getting a loan through a private money lender. Your partner would not be the lender, but rather a joint purchaser of the home and therefore take part in the ownership.
This would be similar to purchasing the property all cash as above, because you would have no loan secured against the home. However, you no longer have 100% ownership of the property.
Here’s a simple example:
You and a partner each put up $50,000 for the purchase of a $100,000 home. In this case, you both put in 50% of the investment, and would generally each hold a 50% ownership in the property. Of course, you may always end up agreeing on a different percentage of ownership. It’s totally up to you.
Let’s review another example with a loan just to show you the flexibility of combining 2 strategies. Suppose you want to purchase the same home priced at $100,000. You might structure the deal by securing a new loan and an equity partner.
Your scenario would look something like this…
$100,000 Purchase price
$50,000 Loan (Seller financing or other private lender)
$25,000 Your down payment
$25,000 Down payment from your equity partner
*You still buy the same $100,000 home, but with less of your own cash used for the down payment. The tradeoff is that you now have an outstanding debt of $50,000.
5. Private money lender
A private money lender (or private money investor) is different from an equity partner. They provide a loan secured by the property and do not take any ownership of the home. You are the owner of the property and you will have a lien secured against your home until the loan is paid off. (Just like a normal bank mortgage.)
The private money lender is normally an individual person who will lend you money to buy your home – even when you have no credit or bad credit.
Qualifying for a loan through a private money lender may be possible when you can show that you will make a significant down payment and can document enough income to prove you can make the monthly payments.
Since private money lenders require a large down payment, they are able to offer you a loan when a traditional bank or credit union would not be able to approve your credit. As a general rule, you will need a 35% down payment for a private money loan.
There’s More Than One Way to Skin a Cat
In the world of real estate, almost everything is negotiable.
Keep in mind that people sell their real estate for many different reasons. Some move away to another state, while others are under pressure for financial or family reasons. You never know when you might run into someone who is eager to sell their investment property. They may be willing to be very flexible and work with you to make the deal a win-win scenario.
So go ahead. Get creative. Ask questions. Look for opportunities. This is how smart real estate investors think, and it’s also why there are different ‘creative financing’ tools that are available – for the right situations.
There’s no doubt about it. Good credit will always make the lending process easier for you. However, I hope the five suggestions above will open up your mind to the different ways you can purchase a home when you have low credit scores.
Now the choice is completely up to you.
You can start the process of working on your credit now so you can eventually qualify for a conventional loan through a mortgage bank. This will take longer, but improving your credit is going to benefit you in many ways down the road.
You can also get creative in finding other ways to finance a property now. Either way, I truly hope you find your little piece of California real estate sooner or later.
Please feel welcome to post your comments and questions below. We’d love to hear from you!