Mortgage loans for someone with bad credit?

Our son has a fairly low credit score with a median of 618. Long story, but basically he has no credit, which is part of the problem. He is only 28. He has lived in a townhouse that we own and fixed up, but now he wants a house. He is single and has only the one income. He has a business and deducts a lot of his expenses. Well, that'll kill ya. He writes off phone, cell phone, a storage area for supplies, advertising costs, equipment, truck lease, mileage, etc., all legally deductible expenses. His net income is much lower than his gross. It is a very unusual situation.

He found a house he loves and wants to buy, but the only mortgage company that will take the risk, probably due to all the foreclosures of late, is going to charge him a loan origination fee of 1% and the loan is a 40 year, 9.15% interest rate with a prepayment penalty for the first two years.

Is this awful? Do you think he should just buy it and put up with the high rate, the high closing costs and the 40-year mortgage to get in? He can always refinance in two years and add to his equity with some cash.

Does anyone know anyone who writes such loans? This company can close in a week, which is great. But do you think this is the best he can do?

Any help you can offer would be appreciated. I am a real estate broker and feel completely lost as to how I can help. What a helpless feeling.

Two things I would check into...

Has he tried a small, local bank? When I was looking for a business loan, none of the big boys wanted to even talk to me, but a very small local bank took the risk.

Also, has he tried Bank of America? Now let me preface, I work for them in corporate training, but I am not trying to sound like an ad for the company. When my younger brother was looking for a mortgage and hitting roadblocks, B of A was able to offer him a better deal.

Let us know how it works out.

I will have him try Bank of America. I don't know of any local banks that are small. Most are part of the biggies. I will think about it, though. Maybe something will occur to me.

If our money was not tied up for another ten years in Roths, we would finance it for him. That would be a great payday every month!

I will keep you informed. I know that foreclosures are a big problem nowadays. The banks just aren't taking risks, but here they are, offering a high interest loan that will be more difficult to afford. That seems counter-productive to me. Seems like a neverending circle of foreclosures will follow, with these high rates.

Why not just co-sign with your son? My dad did for my first house. If you are worried that he will not be able to make the payments, then I would tell him to wait. The interest rate that was quoted is crazy and should be around 6-7% at the most.

The payment on a $100,00 for example would have a monthly payment of $783 and total interest payments for the length of the loan would be $276,000. (9.15% for 40 yearss)

The payment on a $100,000 for another example would have a monthly payment of $623 and total interest payments for the length of the loan would be $128,000. (6.5% for 30 years)

I am an accountant and would advise your son not to do it.

Ron Howard

Below is a link to calculate the mortgage payemnt for the actual amounts.

http://www.schmoyercpa.com/tools.html

He doesn't want us to co-sign. He is trying to do this on his own. It will be interesting to see what he does with this. I trust him more than I trust anyone. He is a very hard worker and would dig ditches to make a living, if the business suddenly dried up. When our daughter moved into her new house, he was like a machine, carrying boxes and furniture up and down stairs for hours. No one else worked without long breaks. He has an incredible work ethic. I wish he would just go back to college and be determined to finish, then he could get a job with a regular paycheck.

The mortgage companies don't care about the character of the borrower, just their bottomline. I understand it. But it would be nice if they looked at the character of the person.

House

rickandcindy23 said:

He doesn't want us to co-sign. He is trying to do this on his own. It will be interesting to see what he does with this. I trust him more than I trust anyone. He is a very hard worker and would dig ditches to make a living, if the business suddenly dried up. When our daughter moved into her new house, he was like a machine, carrying boxes and furniture up and down stairs for hours. No one else worked without long breaks. He has an incredible work ethic. I wish he would just go back to college and be determined to finish, then he could get a job with a regular paycheck.

The mortgage companies don't care about the character of the borrower, just their bottomline. I understand it. But it would be nice if they looked at the character of the person.

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What if he purchased a two family house.??? He would have the income from the rent to offset his payments. Also, he has a small business. Is there someplace that helps and gives advice to small busness owners.?He could also use his garage for his business storeage, as long as where he lives will allow it.

He plans to have a roommate at this new house, to offset expenses, but none of the mortgage companies would take that into consideration in their numbers.

The house has a 4-car garage, which is one reason he is stuck on this particular house. This will eliminate his storage expenses. I don't know what he was paying to store his equipment and products, but it was a lot. I think it was about $150 per month for a storage unit near his place.

He has to establish credit in order to qualify for a better rate. Establishing good credit over time will raise his score. Certainly, making on time payments on a mortgage for 2 years will help establish credit. In the meantime, he can establish a relationship with a local credit union that has good rates on loans and mortgages so when he does have a track record of 2 years of payments on this loan (assuming he can really afford the payments and the taxes and the upkeep on the home) then he will be eligible for a much better loan.

The other thing to look at is debt to income ratio, and also what percentage he will be putting down on the home. You tend to get better rates if the down payment is > 20% of the purchase price.

He should also look around some more. He probably has C or D credit and that's the rate he's going to have to pay now. But there are certainly other sources for C or D credit.

The alternative would be to take the next couple of years to establish credit, get his credit score raised and save more for a higher down payment on a home.

-David

It depends on how much he wants THIS house. Using Ron's example above, it seems the payment in his first example would be a wash when you subtract out the money your son is paying for storage expenses.

rickandcindy23 said:

Our son has a fairly low credit score with a median of 618. Long story, but basically he has no credit, which is part of the problem.

I am a real estate broker and feel completely lost as to how I can help. What a helpless feeling.

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rickandcindy23 said:

He doesn't want us to co-sign. He is trying to do this on his own.

The mortgage companies don't care about the character of the borrower, just their bottomline. I understand it. But it would be nice if they looked at the character of the person.

Click to expand...

There is a reason that your son has a credit score of 618, it may be a long story, but there's a reason.

If I were a real estate broker, I'd know a lot more about mortgages.

My parents co-signed for two maybe three of my first houses, either because I overbought or because I hadn't sold the last one before the next. They never made a payment. There's no shame in parents co-signing.

Many mortgage companies do care, but they didn't bear the child, they have only the credit score to guage their worthiness.

Spence is right- just because you cosign does not mean he will need your help in any way and there is no shame in getting the best deal for the money. If that deal involes your signature then it is just good business. It is also about being realistic and not wasting money! Good luck.

Has he worked with a good broker or is he just looking on his own? I had a problem 3-4 yearsa ago and found a really creative broker that shopped my loan around till he found just the right deal for me. Glad I took the time to wait for the better deal.

My only comment is that he will save a TREMENDOUS amount of money by having you co-sign. A real estate purchase should always be evaluated from financial and not emotional terms.

For him to want to "do it on his own" is a commendable sign of maturity but a TERRIBLE business decision.

Has he tried something like Lendingtree.com? The bank that holds the mortgage doesn't have to be local.

The downside to co-signing the loan is, of course ,that it will be on your credit history. Should you need available credit you will be affected by this outstanding loan as well as by any late payments etc.

I dont understand what his write offs have to do with a loan. That pertains to his tax return not his ability to get a loan.

The loan you mention is financially a bad idea. If thats his best option he cant afford a house at this time. His best bet would be to establish good credit over a couple years then start looking again.

He tried Lending Tree and had some responses, but Coldwell Banker's loan department seemed to be the only company that really came through with anything. That is where the high rate comes in.

I am a real estate broker/ Realtor, but I have not done much with my license. I have been licensed for about 5 years now and have only made about six sales. The reason I renew is to help my kids at this point. I have helped our daughter with three houses already. Our other son is listing his house this summer for a move up. I don't really like the business and count on my two mortgage people to find the loans and advise me on what my buyers (mostly the kids) can afford.

There are good reasons why his credit is so bad. When his business was brand new, he was also going to college and was offered lots of credit cards. He applied for several and got them, but he was young and stupid and had himself in a jam about 4 years ago. We bailed him out. He is paying us $300 per month to pay off that debt. We refinanced our house to help. We did well with the refi--6.25% down to 4.75% for a 15-year mtg. We also loaned our other son money at the same time for his 20% down. It was a great solution for both of them, at a very low rate.

He really wants the house. There were two that we looked at: this new one (DR Horton Sherman model) that he is crazy about with tons of space-- 3201 square feet(too many bathrooms --4 1/2 ), and an 1150 square foot basement. The house has been sitting there for months and months. They reduced the price significantly from others that sold, just to get rid of it. They also added wood blinds on every window to make it more appealing. It is $55K off of the supposed asking price.

The other house is in what I consider to be a better neighborhood and is owned by Boeing. The company bought out the mortgage and relocated the family to another state. The price is much-reduced. I favor the area and the exterior of the houses, but not this particular house's interior. Houses all around are going for $80K more than this one. It is still large and is built by John Laing. It also has a 4-car garage. I think we can get it for an even better price. If it had one more bathroom on the second level, he would like the house much better. It has some problems, like linoleum instead of tile in the 2 1/2 baths and the bathtub/shower tile is just plain white squares. The carpet is looking worn, cabinets have some scratches and the light maple is yellowing a little, plus the Corian counters are scratched. It needs some work and upgrades. About $5K would do everything but carpet. It is about 3 1/2 years old and was built by John Laing. The laundry room is upstairs with the four bedrooms, where all laundry rooms should be! I like that feature.

David, I think you are right. Two years of payments will help his credit immensely. This is what I have been pondering most of the night. A person has to decide if paying a lot of interest is worth a higher credit score. He would be living pretty well in the meantime. He loves that new house more than any other we saw. Maybe interest rates will reduce, the value will go up and his appraisal for refinancing will be high enough that the 20% equity will be there, without more money down. His payments could go down by $500 per month by that time. Real estate didn't use to be a gamble, but it certainly seems like it is lately. Values have gone down.

ronmhjr said:

Why not just co-sign with your son? My dad did for my first house. If you are worried that he will not be able to make the payments, then I would tell him to wait. The interest rate that was quoted is crazy and should be around 6-7% at the most.

The payment on a $100,00 for example would have a monthly payment of $783 and total interest payments for the length of the loan would be $276,000. (9.15% for 40 yearss)

The payment on a $100,000 for another example would have a monthly payment of $623 and total interest payments for the length of the loan would be $128,000. (6.5% for 30 years)

I am an accoutant and would advise your son not to do it.

Ron Howard

Below is a link to calculate the mortgage payemnt for the actual amounts.

http://www.schmoyercpa.com/tools.html

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We all know this is relative. We have enjoyed many years of low mortgage rates in this country, so we forget the bad times. When we bought our first house in 1975, we got an FHA loan at 7 3/4%, our second was 8 1/2%, then our third was 10 1/2%. The second and third were during the late seventies, when prime rate was in the double digits. We bought our third house anyway, in spite of our families' concerns (we were only 24). We refinanced that house quite a few years later at 8% and thought rates would never go down to that level again.

I have heard predictions of increases into the 8-10% rates in the near future. I hope that does not happen because it will kill the real estate market and all of our homes' values. But it could happen--it did happen in the '70's. Our house was surrounded by foreclosures, but most of those people were paying much higher than our 10 1/2%. I know one of our neighbors was paying 14% on an FHA mortgage. They walked away, sold their cars, bought junkers, saved their money, then came back to the neighborhood and paid cash for a bigger house that was also a foreclosure.

Any financial advisor will advise that co-signing is a bad idea. If his business goes downward you are on the hook and if he misses payments you will have that on your credit report before the lender even contacts you about the late payments. As much as you trust your son, it is best NEVER to co-sign on a loan for anyone.

There are several sub prime mortgage lenders out there who will lend to people with low scores (First Franklin, owned by Merrill Lynch is one that comes to mind). However if he is a first time homebuyer, check with the states housing authority. They usually have loans aimed at first time homebuyers that are backed by the state or state issued bonds, so the rates tend to be competitive. Some lenders won't push these loans because they receive a better return on other mortgage products or they don't participate in the programs.

You can find the Colorado Housing and Finance Authority at http://www.colohfa.org . I work in the mortgage industry and many of these state agencies are coming out with new products to help people dig themselves out of the bad sub-prime loans that people have gotten in to in recent years. They may have something to offer that fits his situation.

dioxide45 said:

Any financial advisor will advise that co-signing is a bad idea. If his business goes downward you are on the hook and if he misses payments you will have that on your credit report before the lender even contacts you about the late payments. As much as you trust your son, it is best NEVER to co-sign on a loan for anyone.

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I would agree with you about not co-signing. As an accountant we sometimes get caught up in the numbers and what they say and not look at the other side. I was just trying to recommend a way to make the numbers look more reasonable by having a co-signor.

Good luck to your son! As a third party that is not personally involved and had debt issues myself; I would recommend patience. There are other houses out there.

Ron

I agree with Spence. If you trust him that much, co-sign. Keep the extra money in your pocket, not the lender's. If his pride is jeopardized, let him pay you the amount he would have paid at the higher rate and you can give it back when he refinances in two years- or whenever- as long as you put a balloon date on the deal to get you out of it. His credit score should dramatically increase after 12 months of timely payments, among other steps to create new good credit.

I am also a real estate broker. My parents co-signed when I bought my first house. I had a decent credit score, but low income because of self employed status. Yes, deductions did matter, at least in my case.

What a wonderful way to help your kids build financial security. I hope to pay it forward by helping my own in the next few years.

Good luck!

Jana

Hi,

I just saw this post. Your son need not wait two years to establish good credit. The best thing that you can do for him to help him raise his scores immediately is to make him an authorized user on some of your oldest credit cards with the least amount of debt owed. He will adopt your good credit with respect to these cards. Do not chose any with late payments as he will also adopt your bad credit. Only choose those cards where your credit history is clean. If you go this route, make sure that the company will actually report on the authorized users credit report. You do not even have to give your son the cards.

Have your son take a look at www.creditboards.com for several reasons. First, if he is serious, if he studies creditboards carefully, he can have scores over 700 within 6-9 months. Also, they have a mortgage board that can answer many of your questions and the credit board will let you know which cards report authorized users. Good luck.

Excellent advice Dani. All too often, I work with young people who intentionally avoided credit cards to maintain good credit. The problem is that sometimes bad credit is better than no credit. At least you have something to submit to lenders.

Two years ago, I put my son on my MBNA Visa and never gave him his card. Now when my kids are mature enough to buy, they will walk in with a steller score. Provided they don't screw it up on their own!!

Jana

That is a great idea. I had no idea you could even do that. I will call and add him to our oldest card--our American Express. I wish I would have known about this years ago.

Josh found a site that has credit advice and allows him to see his credit scores all the time. They charge a monthly fee, but he is going to stop that when he is in his house. His median credit score is up 20 points from when I posted this. He has been writing letters to dispute some items on his credit. This has been working. I told him to do this a while back, but he decides to do it when he is trying to qualify him for a house.

Josh is locked into an interest rate of 7.9 with a company that takes the gross income into consideration for loan approval. There is a prepayment penalty for the first two years. He is going to close on the 30th of this month. He is so nervous! I am feeling good about his being nervous. Buying a house is one of the biggest decisions you make in your life, especially a large house like this particular one. He will be there for years.

rickandcindy23 said:

That is a great idea. I had no idea you could even do that. I will call and add him to our oldest card--our American Express. I wish I would have known about this years ago.

Josh found a site that has credit advice and allows him to see his credit scores all the time. They charge a monthly fee, but he is going to stop that when he is in his house. His median credit score is up 20 points from when I posted this. He has been writing letters to dispute some items on his credit. This has been working. I told him to do this a while back, but he decides to do it when he is trying to qualify him for a house.

Josh is locked into an interest rate of 7.9 with a company that takes the gross income into consideration for loan approval. There is a prepayment penalty for the first two years. He is going to close on the 30th of this month. He is so nervous! I am feeling good about his being nervous. Buying a house is one of the biggest decisions you make in your life, especially a large house like this particular one. He will be there for years.

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Yes, use an Amex card, but also make him an authorized user on a regular credit card. Amex is a "charge card" and does not report the amount of credit that is available. This means that it is not counted towards the amount of credit available and does not impact upon the "utilization" percentages that are taken into account in our credit scores. It is important that your son has a utilization below 30% on all cards indivdually and overall. For instance, if he owes $5,000 and has 10,000 in available credit, then he would be an overall utilization of 50%. If you added him to say a credit card that has $15,000 available, this would bring his total available credit to $25,000 and his utilization to 25%. This would have a very good impact on his score. Things would be even better if all of his cards were below 30% utilization.