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Banks don't loan money to
just anybody. They want to feel secure
that you're able and responsible enough to pay them
back. So you'll usually need these things in order
for the bank to give you a loan:
- Enough money for the Down
Payment (3 to 20% of the purchase
price)
- Two years of steady employment (same
job or field)
- Good (not perfect) credit
score (~660+, as of 6/09)
- Monthly income that's 2 to 3 times higher
than your expected monthly mortgage
payment
If you don't
have all four items above right now don't fret.
You still have some options.
- Meet with a lender anyway. Don't just
assume you can't get a mortgage. It can't hurt
to go talk to a bank and see whether they're
willing to give you a loan. Even if they won't
give you a loan they can probably help you by
letting you know where the deficiencies are, so
you can work towards qualifying in the
future.
- Try for a Low-Doc or No-Doc Loan. As
I write this in 2009 these are fairly rare now
because banks lost a lot of money by giving
these out like candy, but as time goes by I
think banks will offer more of these again. Not
as many as they used to, but it will still be an
option for some people, so I'll continue to keep
this section here.
Anyway, these loans are for people who can't (or
don't want to) provide details about their
income or their employment. The most popular is
called a Stated Income loan because you
just "state" how much income you have without
offering any proof. It's also called NIV for "No
Income Verification" because your income isn't
verified. Weth No Ratio and No Doc
loans, you don't even say how much you make. You
can think of these as "Don't Ask, Don't Tell"
loans. The No Doc is also called NINA, for "No
Income & No Asset verification". Because
income is never proven with any of these loans I
joking call them the "Drug Dealer Loans", though
of course there are many legitimate reasons for
wanting a loan of this type.
Since the bank is taking a bigger risk on you
with a No-Doc or Low-Doc loan, the interest rate
is higher than on a traditional loan, and the
exact amount depends on your credit score, your
lender's preference, and which flavor of
low-doc/no-doc loan you get. The premium you'll
pay will range 0.125 to 3.0 percentage points
over a traditional loan.
I got one of these loans myself once. I had
started a new business a year earlier and was
easily making enough money to make the mortgage
payments on the house I wanted, but because the
business was brand-new I didn't have income
history and there was no way a bank would
give me a traditional loan. My good credit, and
my willingness to pay a tiny amount of extra
interest, was enough to get me the loan without
having to supply any paperwork.
Here's how the different loans stack up.
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What
you need for each kind of
loan
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Regular Loan
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Stated Income
("NIV")
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No Ratio
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No-Doc
("NINA")
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Income
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You provide proof (e.g., paycheck
stubs, W2's)
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You just tell the banker how much you
make and they take your word for it
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You don't even say how much you make.
(Don't ask, don't tell.)
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Down Payment Needed
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✔
Small
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✔
Small to Bigger
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✔✔
Bigger
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✔✔✔
Biggest
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Credit Required
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✔
Fair
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✔✔
Good
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✔✔
Excellent
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✔✔✔
Near-Perfect
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Employment History
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✔
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✔
|
|
|
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Proof of Assets
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✔
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✔
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Possible
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Proof of Income
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✔
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Interest Rate
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✔
Lowest
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✔✔
Higher
(+0.125% to 1%
higher)
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✔✔✔
Highest
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✔✔✔
Highest
(up to 3%
higher)
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More
on Low- and No-Doc Loans from MSN.
- Use a Mortgage Broker. A mortgage
broker represents lots of different lenders so
they can shop around to try to find one who will
make you a loan. They charge a fee for this
service but if you can't get a mortgage
otherwise then it could be worth it. You can
find mortgage brokers in the homes section of
the newspaper classifieds and in the yellow
pages. A good online broker is E-Loan.
- Try to get the owner to finance all or
part of the cost of the home. Getting an
owner to finance a home is difficult, but if you
have no other options then it's worth a try. You
can increase your chances of success by offering
a higher interest rate and/or asking the owner
to finance only part of the cost of the home.
See our page on owner
financing.
- Get a co-signor. See if a family
member or very close friend with a higher income
and better credit than yours will cosign
a loan for you. That means that the loan will be
yours and you'll be responsible for paying it,
but if you don't, the cosignor will have to pay
it. Obviously the cosignor will have to have
agreat deal of trust in you for this option to
work.
- Have a friend or family member buy the
house, and rent-to-own it from them. Friends
and family might be wary of co-signing a loan
for you because their credit gets ruined if you
don't make the house payments, and they have
little recourse against you. A more attractive
alternative is to have your friend or family
member buy the house in their name, and then
rent it to you with an option to buy.
Here's how it works: You'll make the mortgage
payments and pay for taxes, insurance, and
maintenance, as your "rent". You can get the
house in your name by either making all the
payments after 30 years, or by buying the house
for the amount of the remaining mortgage once
your credit improves enough for you to get your
own loan. If you fail to make your payments, you
forfeit your right to buy the house, and your
friend/family member can either pick up the
payments or sell the house. Either way, they're
not out because they already own the house. They
don't have to foreclose if you don't pay,
because the house was already in their name. For
that reason this arrangement can be more
attractive to them than the idea of their being
a cosignor.
In fact, if you don't have the money for a
down payment, your friend/family member might
loan you the money for the down payment as well
-- usually for a slightly higher interest rate
than the mortgage.
A downside of having someone buy the house
for you is that the interest rate will be about
1% higher because the house will be considered
investment property for the buyer and not a
residence, since they're not going to live in
it. Still, if the only way you can get yourself
into your own home is to pay a little more
interest, it might be worth it.
- Plan for the future. Even if you
can't buy a home right this very minute if you
make home-owning a serious goal then within two
years you can probably overcome most or all of
any obstacles above.
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