Non-Qualified Loan

What are No Doc Loans?

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If the thought of getting a mortgage frightens you because of the vast amount of paperwork that is required, you may want to look at no doc loans. While these loans have certainly taken a back seat to traditional loans in recent years, they are still available from a select few lenders.

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The people that are good candidates for the no doc loans are those that are self-employed, retired, or newly employed with little history to verify. What’s the tradeoff for the ‘no doc’ loan? Typically, you’ll pay a higher interest rate and higher closing costs than a borrower that gets a traditional loan.

What do you Need for No Doc Loans?

The name no doc is a little misconceiving. Yes, you still need to provide some documentation to get the loan. The lender needs to make sure that you can afford the loan beyond a reasonable doubt. Typically, people with this type of loan don’t verify their income, but they are able to back it up in some other way, such as:

  • A high credit score – If you can’t quite verify your income because you are self-employed or don’t have a long employment history, but you have a high credit score, your income may not matter. Lenders can tell a lot from your credit score. They can tell if you pay your bills on time, how much credit you have outstanding, and what your credit history is like going back several years. If you have great credit, you may be able to convince a lender that you are a good risk.
  • A lot of assets – If you are able to verify your assets, we suggest that you do it. Not verifying your income is risky enough or lenders. If you can show them that you have a large amount of assets in your checking, savings, or investment accounts, they may be more willing to give you the loan. They will generally base your assets on the number of months of mortgage payments that they cover. The more months you can cover, the higher your likelihood of getting the loan becomes.
  • A large down payment – Lenders want to know that you have your own investment in the home. If you don’t verify your income, at the very least, they want your own money invested in the home. This way they have more reassurance that you will do what it takes to get the mortgage paid no matter what happens. If you only put a little bit of money down, you have a higher likelihood of walking away from the home.

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An Alternative to No Doc Loans

If you can’t find a lender or you don’t like the high rates and fees that come along with the no doc loan, you may have another option – the Bank Statement Loan. This is a good option for those borrowers that have good income, but can’t prove it via their tax returns or W-2s. The Bank Statement loan allows you to verify your income through the use of your bank statements over the last 24 months. The same rules apply as with the no doc loan, though. Because the lender isn’t officially verifying your income with your W-2s and/or tax returns, they will need to see some compensating factors. At the very least, they want a large down payment and money in savings to cover at least a few months of payments.

While no doc loans might not be the most common anymore, they are available from a variety of lenders. You may have to shop around a little bit to find a willing lender including using a broker or shopping for a lender online rather than just in your local area. It’s a good idea to get quotes from at least three lenders so that you can find the loan that costs the least amount for you.

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What Compensating Factors do you Need for Low Doc Loans?

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Low doc loans still exist, contrary to popular belief. They just aren’t as widespread as they once were, especially after the housing crisis. Lenders are starting to realize that there are still people that need these low doc loans in order to get financing. The most common people are the self-employed and the retired.

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In order to get the low doc loans, though, lenders typically look for compensating factors. These are factors that ‘make up’ for the fact that you need a low doc loan. Keep reading to learn the most common compensating factors that lenders want to see.

Great Credit Score

Your credit score can speak volumes to a lender. A great credit score lets a lender know that you are financially responsible. You make smart financial choices, you don’t overspend, and you pay your bills on time. Despite the fact that you need a low doc loan, the high credit score can let a lender know that you are a good risk.

Just what constitutes a great credit score? It really depends on the lender, but typically they want a 720 credit score or higher to consider it ‘great.’ If you have a credit score of this magnitude, you may be able to get a mortgage without a lot of documentation.

A Lot of Reserves

Reserves are money you have set aside that you won’t use for the purchase transaction. In other words, it’s an emergency fund that you have set aside. Lenders like to see reserves because it gives them peace of mind that you will be able to pay the mortgage even if something happens to your regular income.

Lenders measure your reserves based on the number of mortgage payments it covers. For example, let’s say that you have $10,000 in reserves and your mortgage payment is $1,000. You have 10 months of reserves on hand or you can cover 10 months of mortgage payments.

There isn’t a certain amount of reserves that you must have on hand – but obviously the more you have the better your chances of approval. Lenders typically like to see at least six months of reserves on hand, but if you have more, it can only help your chances of getting approved.

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A Large Down Payment

Lenders want to know that you have an investment in the home. If you only put a small amount of money down, it may not be incentive enough to keep making your payments if something happens to your income.

The more money you can put down on the home (from your own funds), the lower the risk of default becomes. For example, let’s look at the difference between a 3% down payment and a 15% down payment.

If you want to buy a $250,000 home, you would put down $7,500 for a 3% down payment and $37,500 for a 15% down payment. That’s a big difference. If your business folded and it became difficult for you to make your mortgage payments, you might consider walking away from a $7,500 investment, but a $37,500 investment would be a lot harder to walk away from in most cases.

Each lender has a specific amount that they want you to put down in order to compensate for the low doc loan. Usually down payments of 20% or higher are highly desired, but any amount that you can put down that is above the minimum requirement can be a compensating factor.

History in the Industry

If you are self-employed, it helps if you have a long history in the industry that your business is in. This gives the lender reassurance that you have what it takes to succeed as a business owner. If you don’t have the right experience because you just entered the industry, it can be a red flag for a lender as they try to determine if you will succeed or not. Since no one can predict the future, they go off your past and without a past for them to evaluate, they may not want to take the chance on your low doc loan.

Each lender will have their own requirements and have a different threshold on what they consider compensating factors. If you need a low doc loan, talk to various lenders. See what they require and what they would consider ‘a compensating factor.’ You can then compare the costs and the interest rates offered by each lender to help you decide what will work for you.

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Does a Garage Add Home Value?

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You may not think of your garage as adding value to your home since it’s not living space, but it can help. Adding a garage adds storage space, which is of high value to many buyers. Where your home is located and the type of garage you add will determine how much value it adds to your home, but know that you’ll see some type of return on your investment.

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Why Garages Matter

You still may be wondering why a garage would add value. Let’s look at it from the buyer’s point of view. Garages can:

  • Provide storage space for your vehicle
  • Provide storage space for items you don’t need on a regular basis
  • Great place to conduct hobbies, like woodworking or mechanics
  • Serve as a ‘man cave’

The uses for the garage are literally endless. There isn’t a specific use you must use it for in order for it to affect your home’s value. Just having a garage will help increase it.

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The Type of Garage Matters

There are two types of garages you can choose – attached or detached. Typically, attached garages provide the most value. This is mostly for convenience purposes. Detached garages are harder to access, especially in areas of bad weather, but that’s not to say that they won’t add any value to your home, because they do.

Believe it or not, attached garages cost less to construct. If your property isn’t set up to accept an attached garage, however, a detached garage can add value. This is especially true if detached garages are the ‘norm’ for the area.

The Style Matters

Even though it may be tempting to construct a garage that looks nothing like your own, but suits your personal preference, you may not see the increase in value that you desire. Homebuyers love a uniform look. Choosing to make the garage look just like the rest of the home will keep your neighbors happy and your home value up.

How Much Do Garages Increase a Home’s Value?

How much of a return on your investment you’ll see when adding a garage depends on the area. Do you live in an area where parking is a hot commodity? Maybe it’s hard to find street parking in your neighborhood. If that’s the case, a garage will add incredible value. If you live in an area where garages aren’t the ‘norm,’ though, you may not see as large of an improvement in the home’s value.

If you already have a garage, but it’s in less than optimal condition, renovating it can greatly increase your home’s value. A large part of your home’s value has to do with its curb appeal. Since the garage is one of the first things people see on your home, an ill-fitting garage could really hamper your home’s value.

On average, homeowners see between a 75% and 80% return on their investment when adding or renovating a garage. Before you decide to do so, talk with a local appraiser to see how a garage will affect your home’s value. If you won’t see that much of an improvement, you may want to find other ways to fix up your home to improve its value.

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5 Ways to Tell if You Can Afford Your Dream House

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Before buying a home, you need to know how much you can afford. You may have the perfect number in your head, but does the lender agree? Knowing what you can afford before you look at homes saves time and frustration.

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Use the simple steps below to see how much home you can afford.

Know Your Monthly Debts

Chances are you have debts now. They won’t disappear just because you buy a home. Credit cards, installment loans, and student loans are a few examples. Lenders use these payments to calculate your total debt ratio.

Don’t worry, lenders don’t include utility bills, grocery spending, or insurance payments. They only consider the payments on your credit report.

If you notice you have too many debts, consider paying them down now. The fewer monthly debts you have, the easier it is to qualify for a mortgage.

Know Your Gross Monthly Income

Lenders look at your income before taxes. Do you earn an annual salary? Divide it by 12 – that’s your gross monthly income. You need this number to figure out your debt ratios. Lenders have different debt ratio requirements for each program.

If you work hourly or on commission, use your year-end W-2s to figure out your gross monthly income. Divide the annual income by 12. This gives you an average over the course of the year. This is important, especially with variable income.

Know Your Front-End Ratio

Lenders use your gross monthly income to determine an affordable mortgage payment. Each loan program has its own guidelines, for example:

  • Conventional loans – 28% housing ratio
  • FHA loans – 31% housing ratio
  • USDA loans – 29% housing ratio

Once you know your gross monthly income multiply it by the appropriate front-end percentage. For example, if you make $5,000 per month, your maximum mortgage payment on a conventional loan is $1,400 and $1,550 for an FHA loan.

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Use these numbers as a guide. Your total mortgage payment can’t exceed these amounts. Your total mortgage payment includes:

  • Principal
  • Interest
  • Real estate taxes
  • Homeowners insurance
  • Mortgage insurance (if applicable)
  • Calculate your Back-End Ratio

Your back-end or total debt ratio could reduce how much mortgage you can afford. This is where your total monthly debts affect things. Your back-end ratio is the maximum amount of your gross monthly income you can commit to your monthly obligations. This includes the new mortgage.

The back-end ratios are as follows:

  • Conventional loans – 36%
  • FHA loans – 41%
  • USDA loans – 41%
  • VA loans – 41%

Calculate your back-end ratio by adding up the new mortgage payment with your current monthly debts. Next, you should figure out your max total debt ratio. Do this by multiplying your gross monthly income by the appropriate percentage.

Using the $5,000 monthly income, you could have maximum debts of $1,800 for a conventional loan and $2,050 for government loans. If you want a $1,400 conventional mortgage payment, your other debts can’t be more than $400.

Does your income and debts fit this requirement?

Put the Number Into Your Budget

Thus far you have a fictitious number. Sure, it looks good on paper to have a $1,400 mortgage payment, but does it fit into your budget?

If you use a computer program or app to keep track of your budget, toss that $1,400 payment in there. How does your bottom line look? Do you still have money for your ‘other expenses?’ Can you still live the life you’re used to? Do you need to sacrifice? Are you willing to sacrifice?

If you don’t use a program or app, physically take $1,400 out of your bank account. What’s left? Can you cover your other bills? Do you have the cash to do the other things you want to do? Try this for a few months and see how it feels. Practicing before you own the home is a lot less risky than taking a chance on late payments and foreclosed homes.

Knowing how much mortgage you can afford before you shop for a home helps avoid delays. You can shop for a home within your budget. If you have the necessary qualifications for the loan, you’ll have fewer issues getting approved.

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Understanding ITIN Loan Programs

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Foreign nationals often want to set down roots in the United States. Most loan programs require a social security number, which you don’t have. This may make you feel like it’s impossible to get a mortgage, fortunately, there are ways around it. If you have an ITIN, and you meet the loan requirements, you may secure the financing you desire for a mortgage.

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Credit is Important

Before lenders will approve you for a mortgage, they need to see your financial habits. Do you pay your bills on time? Do you overextend your credit? Lenders need these answers.

The only way to get those answers is with a credit history. Without a social security number, though, you won’t have one. Fortunately, many creditors extend credit with just an ITIN.

We recommend starting small. Apply for a secured credit card, which is a credit card with a deposit. The credit card company reports your credit card usage and payments to the credit bureau in exchange for a deposit on your account. The credit card company will give you a credit line equal to the deposit. If you put $100 down, you get a $100 credit line.

As you use your credit and pay your bills on time, you will build up credit. You may want two of these trade lines just to build up your credit. Once you establish yourself for six months or so, apply for an unsecured credit card or personal loan. Keep your loan amount request small, but see if you can get any other type of loan that will help build your credit.

As you continue to pay your bills on time and use your credit responsibly, you’ll obtain a credit score that shows financial responsibility.

Stay Employed

Lenders also put a lot of emphasis on your employment. They want to know that you’ll be at the same job for the foreseeable future. Because you are an ITIN borrower, you already pose a risk of default. Lenders like to see at least a 2-year stable employment history when you don’t have a social security number.

In addition to your work history, you must prove your work ‘future.’ Because you are a foreign national, lenders care about your plans. Will you be here next year? Will you be here in three years? Most lenders require an employment contract that goes through at least the next three years. If you don’t have a contract good for at least three years, it could make it harder to get an ITIN mortgage.

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Make a Large Down Payment

Unfortunately, as an ITIN borrower, you’ll need a larger down payment than borrowers with a social security number. As a general rule, plan on at least a 20% down payment. In some cases, you may need more. Lenders determine the required down payment on the riskiness of your loan.

For example, if you have a low credit score, you will need a larger down payment than someone with a higher credit score. You’ll also need a larger down payment if you have a lot of outstanding debt compared to your gross monthly income.

The down payment helps offset the risk of default. The lender knows that there is at least a little equity in the home. If you stop making your payments, the lender can sell the home for a profit and keep the funds as repayment.

Before you use funds for a down payment, you have to show its origination. In other words, you need a bank account here in the United States. You also need to be able to show regular deposits. It’s best to have your income deposited directly into your account. It’s easy for lenders to source (your paystubs) and it’s consistent. Lenders want the money in the account for at least two months before they will count it for your down payment. This way they know the money didn’t come from another loan as it would show up on your credit report.

Save Monthly Reserves

In addition to your down payment, you need money in a reserve account. Most lenders require six months’ worth of mortgage payments in your savings account or any other liquid account. If your mortgage payment were $1,200, you would need at least $7,200 in a bank account. If you run into financial trouble, the reserves are there to bail you out. Lenders rely on the reserves, so the more money you have on hand, the higher your chances of securing approval.

Have Compensating Factors

Lenders look for any compensating factors that make up for the risk that being an ITIN borrower pose. The compensating factors could be any of the following:

  • High credit score
  • Low debt ratio
  • More than six months of reserves on hand
  • Long work contract

Try to offset the riskiness of being an ITIN borrower by providing as many positive factors as you can. The more reasons a lender has to trust that you won’t default on your loan, the more likely you are to get the mortgage approval.

ITIN loan programs often foreign nationals a way to buy a home in the United States. With good credit, a decent debt ratio, and enough money saved, you should be able to get the loan you need to buy a home.

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How to Get a Mortgage After Chapter 7 Discharge

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You’ve likely heard that a bankruptcy sits on your credit report for up to seven years. While that’s true, it doesn’t affect your ability to get a mortgage that entire time. In many cases, you can get a mortgage in as few as two years after a Chapter 7 discharge.

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Just how do you do it? Keep reading to learn the steps you should take.

Build Your Credit Again

First, you need to build your credit up again. A Chapter 7 bankruptcy wipes the slate clean. While that is great for your finances, it’s not great for when you apply for another loan. You need a credit history – a positive credit history.

Right after the Chapter 7 discharge, start building your credit. It sounds odd, why would you take on new debts after getting out of debt, but it’s important. Don’t jump in headfirst and drown in debt again. Instead, take it slow.

Start with a secured credit card. You may only get a credit line of a couple hundred dollars, that’s okay. Take it and use it. Don’t keep a balance, though. Pay the credit card every month. Charge expenses you normally pay anyway. Show lenders that you are financially responsible even after filing bankruptcy.

Once you have a secured credit card, apply for an unsecured credit card or personal loan. Get as much good credit going as you can. You want a decent mix of installment debt and revolving debt with good payment histories. This will show lenders that you can manage your finances again.

Get a Good Rental History

Lenders need to see that you can handle a housing payment even after the BK. If you rent, make sure you make your payments on time. Also, have proof of the payments. If you rent from family or friends, keep canceled checks. If you rent from a rental company, have them complete a Verification of Rent form for you. If it shows that you made on-time payments, it will help lenders make a solid decision on your mortgage.

Fix the Problem

While you build up your credit, think about why you filed for bankruptcy. Did you lose your job, fall ill, or just get carried away with your spending? Lenders are going to ask what happened. They aren’t nosy. They want to know what led to the downfall to see if it’s something that could happen again.

If you want to show lenders that you are responsible, show that you’ve overcome the problem that caused the bankruptcy. If you lost your job, the obvious solution is to have another job. Show lenders that you’ve been at the job for at least 12 – 24 months and that you can succeed at it. If you fell ill and got behind, show lenders that you were able to pick up the pieces and get current again.

You may need to put your reasons and solutions in writing. Have as much evidence as you can to help lenders make a solid decision. They want to know that you’ve fully overcome the issue that caused the bankruptcy.

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Apply for a Government-Backed Loan

Your best bet, especially if it’s only been two years since your bankruptcy discharge is to get a government-backed loan. Most borrowers take out an FHA loan. You only need a 3.5% down payment, a 580 credit score and only have to wait two years after your BK discharge. The flexible underwriting guidelines make this loan a great option.

If you are a veteran of the military, you may be able to use your VA home loan benefits. If you didn’t use them before or you were able to keep your home through the BK, you may still have your VA benefit left. If you have enough of a VA benefit to cover the price of the home (up to $484,350), you won’t need a down payment on it. VA loans, like FHA loans, only require you to wait two years after your bankruptcy discharge to get a VA loan.

Shop Around

If you don’t qualify for an FHA loan, shop around with subprime lenders. Don’t let the name scare you. These lenders offer alternative loans that they keep on their own books. This gives them the flexibility of writing their own guidelines. You may find subprime lenders that have lower credit score guidelines or that will overlook your BK. They often make it easier to qualify for a mortgage after a BK.

Even if you qualify for an FHA or VA loan, shop around. Each lender sets its own guidelines and charges its own rates and fees. Because you have a BK in your recent history, lenders will probably charge more money for your loan. Shop around until you find the most affordable option to help you avoid any future financial issues.

Getting a mortgage after a Chapter 7 discharge isn’t as hard as it seems. You just need to put in the legwork and the try to fix as many credit/financial issues as possible before applying. The more positive factors you can show a lender, the more likely it is that you’ll get approved.

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Watch Out for These Common Mortgage Pitfalls

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Hearing the words ‘you’re approved’ from a lender can be exciting and overwhelming at the same time. Just because you get approved for a mortgage doesn’t mean that you have to take it. All too often, borrowers make mistakes that cost them thousands of dollars and even their good credit history.

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Lear the top mortgage pitfalls many borrowers make to help you avoid these issues yourself.

Taking the Full Loan a Lender Offers

When you apply for a pre-approval from a lender, they qualify you for the maximum amount of loan you can afford on paper. Notice that we said on paper. The lender qualifies you based on your debt ratio, credit score, and income. This doesn’t mean you have to take the full loan amount, though.

Before you accept a loan amount, look at the numbers ‘in real life.’ Don’t just take a lender’s word for it. Take the mortgage payment and see how it fits into your budget. Can you comfortably afford your other monthly payments? Do you have discretionary income available still? Is the amount much higher than you anticipated? Just because a lender says you can have the higher loan amount doesn’t mean you have to take it.

The amount the lender offers is the maximum loan amount you can have. Accepting the maximum loan amount could make you ‘house poor.’ In other words, it may get difficult to make your mortgage payments, forcing you to regret your home purchase. Don’t let that happen to you.

Taking the First Offer you Receive

Again, hearing the words ‘you’re approved’ can make you jump for joy. Before you take the first loan you get approval for, though, take the time to shop around. How do you know that the terms and rates the first lender offers are the best available to you?

We recommend applying with at least three lenders. This way you can compare the loan offers. Look at the terms, first. Are they all offering a fixed rate loan or is a lender giving you an adjustable rate loan? What about the length of the term, are they all 30-year loan terms or are some lenders offering shorter terms?

Finally, look at the interest rate and closing costs. Compare them side-by-side. You may notice that the lender that offers the lower interest rate charges much higher closing costs and vice versa. You want to find the lender that offers the loan with the costs you can comfortably afford.

Looking at the big picture from all of the offers will help you choose the right loan. Choosing the first offer you get could force you to pay much more than necessary for closing costs or provide you with less than optimal terms. Take your time and find the loan that’s right for you.

Not Knowing Your Credit Score

You should be an informed borrower before applying for a mortgage. A big part of this means knowing your credit score. Lenders use your credit score as the basis for determining your approval. A low credit score can leave you with less than optimal terms and higher interest rates. A high credit score may offer you more opportunities for more affordable terms and lower rates, though.

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If you don’t know your credit score, you won’t know what to expect from lenders. Don’t assume lenders will be honest and give you the best terms available to you based on your qualifying factors. Know your credit score so that you can negotiate appropriately. If you know you have great credit, ask for the lower rate, or ask for fewer closing costs. If you know your credit needs some work but you need a mortgage now, negotiate accordingly, asking for help with closing costs or for a lower interest rate by paying a discount point.

If you know you have a low credit score and you have time to fix it, do it. Get caught up on your bills and pay your credit card balances down. Don’t apply for new credit and make sure you have a good mix of installment debt and revolving debt for the best impact on your credit score.

Not Knowing Your Cash to Close Requirements

Your down payment isn’t the only money you need to close on a home purchase. You have to pay the closing costs too and they could cost as much as 5% off your loan amount. This could add thousands of dollars to your cash to close.

Ask your lender upfront how much the closing costs will run you. By law, the lender has to provide you with a Loan Estimate within three business days of you applying for the loan, but you can also ask your loan officer about the closing costs for more clarification.

If you find that you don’t have the cash to close, as the lender about your options. Typically, they allow:

  • Receipt of gift funds from a relative or employer
  • A no-closing-cost loan in exchange for a higher interest rate
  • Seller concessions to help with the closing costs

The sooner that you know about the closing costs the more time you have to figure out a plan. Finding out at the last minute that you need a few thousand dollars can just add to the stress of getting a mortgage.

Not Having Seasoned Funds

When you put money down on a home or pay the closing costs yourself, you need seasoned funds. This means funds that sat in your account for at least two months. Lenders consider this enough time for any potential loans that you have to provide you with the funds to show up on your credit report.

This means that you can’t make a large deposit within two months of applying for the loan and expect the lender to accept them. You will have to provide proof of where the funds came from and how you got them. Lenders need to know that there isn’t another loan out there that will affect your debt ratio. If they can’t prove the origination of your large deposits, they may not allow you to use the funds for closing and/or the down payment.

Don’t make these common mortgage pitfalls. Take your time and shop around for the right loan for yourself. Talk with lenders and find out what requirements they have to help you get through the mortgage process with as little stress as possible.

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Should You Build a New Home?

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If you are in the market to buy a home, chances are that you thought about whether you should buy an existing home or build a new one. You aren’t alone. Most buyers go back and forth on this decision. While building a new home seems like the ‘best’ way to do it, there are pros and cons you should consider before making your decision.

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The Pros of Building a Home

There’s nothing like building a new home. Walking in and knowing that everything is brand new and built just for you is a feeling you can’t replicate. But, there are other benefits too:

  • Customization – Unless you buy a spec home, you can typically choose all of the features of the new home. You’ll choose things like the type of flooring, cabinetry, and trim. You’ll even choose the colors of the countertops, carpentry, and door handles. You’ll make so many decisions that you’ll probably want to avoid decision making for a while afterward.
  • Energy efficiency – Building a new home means using today’s latest technology. This often means more efficient insulation, HVAC systems, windows, and doors. According to the EIA, new homes are 30% larger than old homes, yet only use 2% more energy.
  • Less maintenance – New homes often come with a warranty for up to 10 years. If there’s a defect or something breaks down within that time, you may get it fixed for nothing. This will vary by warranty, though. Even without the warranty, everything in the home is new and should last without needing repairs or maintenance for at least a few years.

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The Cons of Building a New Home

The new home smell only lasts for so long and then reality occurs. Knowing the downsides of building a home can help you make the right decision. The downsides include:

  • Longer time to move in – According to the Census Bureau, it takes 7.5 months to build a home. If you were to buy an existing home, you may be able to move in as little as 30 days. If you have a home to sell or your lease is up on your rental, you may have to find somewhere to live in the meantime.
  • Little room for negotiation – Home builders typically don’t negotiate the sales price of the home. You may have some wiggle room on negotiating upgrades or other incentives, but the actual price of the home will likely remain the same.
  • Everything costs money – That beautiful model you walked into and fell in love with isn’t what you’ll get with the base price of the house. Ask the representative what’s included in the base price and you may be unpleasantly surprised. Each upgrade adds to the price of the home, which can make it harder to get a mortgage.

Keep in mind too, that just because a home is new doesn’t mean it’s perfect. Humans build it and they can make errors. Things can go wrong or they could just get lazy. We highly recommend that you still pay for a home inspection if you decide to build a new home. The inspector can make sure that everything is built to last and identify any problems up front.

What Can You Afford?

Putting the pros and cons aside, it really comes down to what you can afford. Know how much mortgage you qualify to receive. Then compare that to the prices of the homes in the area. Again, because all upgrades are extra on a new home, you need to know what you can afford. You may find out that after putting all of the options on the new home that you want that it’s out of your price range.

Comparing the cost of new homes to existing homes in the area will give you a ballpark idea of where you stand. If the new homes are completely outside of what you pre-qualify for on a mortgage, you may want to stick to the pre-existing homes. If the prices are about the same or the new home prices are less than what you qualify for, then it’s up to your personal preference.

Choosing a new home or an existing home is a big decision. Look at the big picture and remember that this is one of the largest investments you’ll make in your lifetime. Think of your goals for the home and how long you plan to live there. Combine that with the amount of mortgage you can afford and you should be able to make a solid decision.

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How to Evaluate an Investment Home Purchase

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Buying a home to rent out can be a very lucrative investment. However before you purchase just any home, you should know what to look for. Just buying a home and hoping to make good money on it isn’t going to work. You have a lot of legwork to do before choosing just the right investment home.

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Where is the Home Located?

Before you purchase an investment home, you’ll want to consider not only the home itself, but also its location. You could have the most beautiful home that suits a family of four, but if it’s in a rundown area and sticks out like a sore thumb, it won’t likely make you any money. In fact, it could be a sinking investment.

Even when you buy a home to live in as an owner-occupied property, you want to look into the neighborhood. You’re not just buying a home, but an area to live. You want it to be somewhere you feel comfortable and enjoy living. The same is true for an investment home. You want it to be somewhere where there is a large rental market and where people would want to live.

A few things you’ll want to consider is the proximity to major things like shopping malls, churches, and schools. If you are buying a home that is large enough for a family with kids, you’ll want to make sure the area is kid-friendly and that the school district is reputable.

Consider the demographics of the area. Is it better suited for retired people or young families or somewhere in between? This will help you determine if it’s a good place for a rental home. If it’s a good area for retired people, you may not have as large of a market of renters as you would if it’s an area for families just starting out.

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What’s the Home’s Condition?

Next, you want to know the home’s condition. Obviously, this plays a role in the home’s value, but you need to dig deeper than that. You need to know how much work the home needs and around how much it will cost. This will help you figure out the financial aspect of the purchase.

It doesn’t matter how cheap you can get the home or how much you think you can get for rent. You have to figure in the cost of making the home livable and desirable. Remember, you are trying to appeal to an audience that has many other opportunities to rent other homes.

Once you know what repairs the home needs, you should figure out if you can afford the repairs. This means can you afford the materials as well as the labor to conduct them? If you can do them yourself, think about the time commitment. Do you have the time to make the changes within a decent period? Remember, time is money.

What’s the Market Like?

You will also want to know what the rental market is like in that area. You can have the best home at the best rental price, but if there isn’t a market, you won’t make any money. Do your research and determine what the going rent is in the area as well as what percentage of vacancy exists. If there is a large number of vacancies, you may want to look at other properties in other areas.

Figuring out if an investment home purchase is worth is a big task. You have many factors to consider outside of the value of the home. Understanding if the home will be profitable for you requires a little research as well as some guessing. The more input you have and the more time you take, the better the decision you will make.

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Investing in Residential Real Estate When You Have Bad Credit

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You have a burning desire to invest in real estate, but you have bad credit. Do you have to stash your dreams away or is there a way to make it happen?

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Luckily, there are ways you can still make your dreams happen. You may not do it the ‘standard’ way, but you can get it done. The best way is to work on your credit first. If that’s not an option, we’ll help you discover other options below.

Improve Your Credit

Start by determining if you can fix your credit. It may seem impossible, but if you take it one-step at a time, you can make it work.

  • Bring all payments current – If you are behind on payments, get caught up. If all of your bills are paid on time, your credit score will start to increase. This looks better to mortgage lenders too.
  • Pay old debt down – If you have a lot of revolving debt, get the balances down. Even if you can’t pay them off in full, get the balances as low as possible.
  • Don’t open new credit – The older your accounts, the higher your credit score. Keep old accounts open and refrain from opening anything new for a while.

These simple steps can help your credit score increase. If you have too many of one type of account, you’ll need to diversify your credit as well. For example, if you have too many revolving accounts, add in an installment loan. This helps diversify the risk and increases your credit score.

Working Around Bad Credit

If your credit score doesn’t increase fast enough, there are a few ways you can work around the bad credit and invest in real estate:

  • Get a cosigner – Someone with good credit that is willing to go into ‘business’ with you can help the situation. You both bring something to the table. Maybe you have the income/assets to qualify for the loan. Your cosigner can bring the credit score. Together you can create a good risk for a lender willing to let you invest in homes.
  • Go subprime – Conventional and government-backed loans are not the only options. Try subprime lenders or credit unions. They often have their own programs. They make up their own rules, which may even allow lower credit scores.
  • Get seller financing – Depending on where you are investing, you may find a seller willing to provide the financing. Since you are investing in the home, you may be flipping it. The seller will know that you will pay the loan off quickly. If they can make a quick buck on the interest while selling their home, they may be willing.

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Should You Invest in Real Estate With Bad Credit?

The bigger question is if you should be investing in real estate with bad credit. You already have issues, should you compound them with an investment in real estate?

Today, the average US credit score is 687. Anything much below that and lenders are leery. Shouldn’t you be too?

If you have a bad credit score, you should ask yourself why. Are you in over your head in credit card debt? Did you let a mortgage or installment loan default? Did you file for bankruptcy? These are all questions you need to ask yourself. Really determine why you have bad credit. Is it something you are overcoming?

Investing in real estate isn’t a ‘get rich quick’ scheme. It takes time and money. You have to either fix the home up and sell it for more than you bought it. If you keep it, you’ll need to maintain the home and rent it out. There’s no guarantee that you’ll make a profit flipping a home or that you’ll find renters. Then you are stuck with this home and its subsequent mortgage. This could put you in a further financial bind.

Consider Your Options

You must consider your options very carefully. If having another mortgage will make you sacrifice if things don’t go your way, it might not be the right choice. If you have a partner splitting the costs with you, though, it may work. Again, you must consider all of your circumstances to see what will work.

The bottom line is that you can find funding to invest in real estate even with bad credit. It may not be rock bottom interest rates. It may even cost you a few points on the front. Investment mortgages aren’t as borrower friendly as mortgages for a primary residence. They pose a risk to the lender. If you are in a bind, you’re more likely to stop making payments on an investment property than your own home.

Consider the costs and shop for a lender that will work with you. Paying high fees or inflated interest rates can only ruin your chances of making money. Look at the process from all angles before deciding that buying another home is the right choice. Once you do your research, you’ll be better prepared for what lies ahead if you decide to invest in real estate.

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