5: No Credit Required Options

If you still can’t qualify for a loan, or would just prefer not to, here are some basic methods for buying a house with no credit check required. These are popular methods for buying with no credit check, and are used by home buyers and sellers everyday.

The 30/70 Rule

The 30/70 rule says that anyone can get a loan with enough money down. Often a bank will give you a loan no matter what your credit is, if you are able to put up at least 30% of the value of the home as a down payment.

The reason for this is that the bank has less to lose if you walk on the loan.They can probably get most or all of their money back if they have to sell the house. Plus, they know when you invest that much, you are less likely to walk away from the house, so it is a better risk for them all around.

You may be talking about a pretty high interest rate on the loan, because the bank may still be worried about the poor credit rating, but you do have the option of refinancing later on. Friends of mine, Rob and Melody, moved to town and needed a house. Because Rob was a pastor who wanted to start a new church, he and Melody had no current income and their past income was not steady. They did have a lot of equity in the home they had just sold. So they were able to find a loan, despite their situation, because they had at least 30% to put down. The interest rate was high, but after two years of good payments, they were able to refinance the loan at a much better rate.

Pick up an Assumable Loan

Sometimes a seller has a home loan that is assumable with no qualifying, which means that anyone can buy the house and take over the loan with no credit check. Keep an eye out for these. The majority of loans are not assumable, which means the buyer must apply and qualify to pick up the seller’s loan. It is about the same hassle and fees as applying for a new loan.

If you find someone who has an assumable loan, definitely check into it. The big questions are: what is the assumption rate (usually one point) and what is the loan interest rate? Hopefully low, but if not, you might still seriously consider it. You would probably have to pay higher rates to get a loan through a bank if you have bad credit, anyway. Remember that you will most likely have to give up something (price, terms, location...) to get something (a house with no credit check.)

To find assumable loans look for older FHA and VA loans. Veterans Administration guaranteed loans that originated before March 1988 and FHA loans originated before December 1, 1989 do not contain a “due on sale” clause and are fully assumable without qualifying. Unfortunately these are getting harder and harder to find. Many sellers have refinanced their loans since then, to take advantage of lower interest rates. Also, since the loans are so old, it takes a lot more money to put down and/or finance to finish the purchase. If you do find one of these, perhaps you can use one of the other techniques in this book to finance the rest of the purchase price.

The” Subject To” Technique

There is an investor technique out there called “subject to” or “sub 2.” In this technique the investor will find an owner who is totally distressed and ready to lose the property, but it has not gone into foreclosure just yet. At this point the investor involved makes up the back payments, takes over the regular payments for the seller, and gets the deed to the property. The loan stays under the old owner’s name. The investor gets the property and can do whatever they want with it-- rent, lease-option, or sell it.

The name comes from the contracts they sign (a “subject to” purchase agreement) that says the buyer gets possession of the home and will be making future mortgage payments.

This may be great for the investor, but the loan liability stays with the seller until the house is sold and although it is not strictly illegal, it is a breach of contract because it leaves the bank or mortgage loan holder in the dark. Most loans have a “due on sale” clause, so the bank can call a loan due when ownership of the home changes. That means that investors who do this kind of “assumption” take the risk that the bank will find out, and ask for all the loan money right then and there. If the buyer does not have the money, the house will go into foreclosure. This may not be likely if the payments are made, but it is risky and according to many, not ethical.

Loan Contract for Deed or Wrap Around Mortgage

One way to get around the newer restricted assumption VA loans is to use a Contract for Deed. This is very similar to a “Sub 2” except with VA loans it is legal and encouraged by the lender. According to the VA loan regulations:

"When a borrower sells on an installment contract, contract for deed,or similar arrangement in which title is not transferred from the seller to the buyer, this is not considered a 'disposition' and ... therefore does not require approval by VA or the loan holder prior to the execution of such an agreement.”

The lender also can’t charge the normal points, processing fees, funding fees, or change the interest rate. That’s a pretty good deal, and there are quite a few of these loans out there.

A Contract for Deed is a method of financing where the owner retains the title to the house until the buyer has paid the purchase price in full. The buyer takes possession of the property and can claim the benefits of ownership, including income tax deductions for interest and property taxes. Since this is not financed through a bank, how to qualify is up to the seller.

This is sometimes called a wrap-around mortgage because the new loan“wraps around” the old loan. The seller keeps the loan in his or her name and uses the buyer’s payments to pay on the existing loan. If the seller does not want to collect payments, the buyer can send them directly to the lender.

There is a sample Contract for Deed at the end of this book, but I suggest you have a competent attorney draw one up for you. A settlement attorney will hold the Deed to the property until the loan is paid off, the buyer refinances, or sells the property. The lawyer records the transaction at the county courthouse, but the buyer is not given full title to the deed until the loan is paid off. This is one reason it is important to get title insurance to be sure your ownership is protected, as well as the interest of the seller and the lender.

Wrap-around loans can be very flexible. They don’t have to follow the original contract. For example the sellers could have the contract for deed due in five years, so they will be able use their VA eligibility again at that time. The seller can also raise the interest rate to make a profit if desired. At first this sounds bad for a buyer, but remember that you can use this for bargaining to get something else you want and to make the idea of a wraparound mortgage attractive to the seller.

The Contract for Deed can be somewhat risky for the seller because the seller remains liable for the loan until it is paid off or assumed (by qualified buyer.) To protect the seller, some contracts state that if the loan is defaulted, all the buyer’s payments become rent and the buyer has no claim on the house. The seller can then evict the buyer as a tenant and take back the house. A contract like this makes it a lot more attractive proposal to present to the seller.

Have the Owner Finance.

This is one of the most common methods of buying a house without getting a bank mortgage loan. The hardest part is finding a seller who is motivated to sell their home this way. (I have some ideas on how to find one of these in a later chapter.) This is a good way for a seller to get a monthly income and still sell their house. This works well in a market where houses are not selling well. Perhaps the owners have a new home already and can’t afford the payments for two houses. Or perhaps the owner is elderly and would like a monthly income. There are many people who would benefit by “carrying the paper” on their home for you. They might not have even considered the option until you bring it up. If you end up doing this, go through an escrow company and lawyer to make sure the paperwork is done legally and to everyone’s satisfaction.

The Seller Carry-Back

This is really a combination of two techniques, Assumable and Owner Financing. If you find a seller with an old assumable loan there probably is a considerable difference between what the seller wants and what the old loan is. When you get the seller to finance what is left from the rest of the money owed for the house, it is considered a “seller carry-back.” This technique can also be used to buy a home with no money down, if the seller will hold a loan for the whole amount.

Important Information for Real Estate Investors:

Important Information for Real Estate Investors:
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