From bird-dogging to seller financing, Carter Brown kicked off the Credit and Debt Summit with six strategies for buying a home with bad credit and no money down. Even if you have a bad credit score and no down payment, Brown explains the six strategies for buying home, or investing in real estate.
Buying a Home with Bad Credit and No Money Down
Carter Brown is a real estate coach for Prosper Learning who started investing in real estate while he was in college. He now coaches other people on out-of-the-box strategies for buying homes or investing in the real estate market. These strategies don’t require any money down, and they can be used by people with bad credit scores.
As part of the Credit and Debt Summit, Brown shared these strategies with registrants:
- Assigning contracts
- Double-escrow closing
- Subject to financing
- Seller financing
- Lease options
Two of the highlights are “subject to financing” and “bird-dogging. “
Buying a Home with Bad Credit and No Money Down Strategy: Subject to Financing
Subject to financing is a perfect strategy for buyers with bad credit and no money down and sellers who are on the brink of foreclosure. It works like this:
The buyer takes over mortgage payments on a person’s house. In exchange, the seller transfers the title to the buyer, but—and here’s the kicker—the seller keeps the loan in his or her name. The buyer, however, starts making payments on the home.
Does this sound crazy? Why in the world would a seller transfer title but keep the loan in his or her name?
It isn’t crazy, and Brown explains why it works;
1. The homeowner (seller) is going to lose the home to foreclosure otherwise. Under “subject to financing,” the seller doesn’t have to go through foreclosure and preserves his or her credit score. Perhaps more importantly, the seller’s financial stresses are over. No longer do they have to worry about coming up with thousands of dollars, negotiating with banks, attempting—and failing—to get loan modifications. The buyer can take over payments immediately, leaving the seller with peace of mind.
2. The buyer and seller can always write a clause into the contract that forces the home to return to the original owner in the event that the buyer misses a payment. And because the loan is still in the original owner’s name, the seller can track the buyer’s payments.
3. Worst-case scenario, the buyer misses a payment and the home returns to the original owner. If this happens, the original owner can start making payments if his or her financial situation has improved. If the original owner’s financial situation has not improved, he or she is no worse for the wear.
Obviously, this strategy is a bit sophisticated. Want the transcripts of Brown’s Credit and Debt Summit webinar? Register for the free summit here and get more details, including information on where you can find qualified sellers.
Buying a Home with Bad Credit and No Money Down Strategy: Bird-Dogging
If “subject to financing” makes you nervous, but you still want to get your foot in the door and start learning advanced techniques for real estate investing, Brown suggests starting with a technique he calls “bird dogging.”
Under this strategy, you don’t actually buy a home, but it allows you to shadow someone who is using outside-the-box strategies, which means you can quickly move up the ladder and start learning about buying a home with bad credit and no money down.
Simple put, bird-dogging is another way of saying that you act as a scout, and you get paid for bringing a seller and an investor together. You also get to shadow the investor so that you learn more about real estate investments.
Let’s say that you are chatting with your neighbor, and you learn that she and her husband are in financial distress. Their house has been on the market for months, but no one is biting. If something doesn’t happen—and soon—the bank is going to foreclosure.
This is where you come in. Simply introduce your neighbor to a real estate investor. Tell the investor that you want to provide a referral for a finder’s fee. If the investor purchases the property, you will receive a fee of about $500.
This isn’t where it ends. Ask the investor if you can shadow the transaction. Let the investor know that you are interested in learning more about real estate strategies. The investor, thrilled that a hot deal has dropped onto his or her lap, will agree.
Brown goes on to describe four other strategies for buying a home with bad credit and no money down. His strategies offer something for everyone—from the seasoned investor to the newbie hoping to get his or her feet wet.
Question: What is a short sale, and is it a good alternative to foreclosure?
Answer: Let’s not mince words. The foreclosure process is a brutally taxing process that will leave you stressed and your credit in tatters. Though it is sometimes the best option to resolve your financial situation, take a moment to make sure you have considered all of your options before foreclosure becomes a reality. Asking the question—What is a short sale, and is it a good alternative to foreclosure?—is a smart place to start. Indeed, short sale might be something to add to our “foreclosure fix” list.
What is a short sale?
Also known as a compromise sale, short sale is the process of selling your distressed property at a lower market value than the balance of your loan. In other words, you will sell the home for less than what you owe on the loan.
The most important consideration for a short sale is finding a qualified real estate agent with experience in today’s market. You should try to find someone who is acutely aware of market fluctuations and who is best able to serve you, whether you are in a buyer’s market or a seller’s market. Many real estate agents are better suited to one market condition or the other.
With the credit crunch affecting many people’s ability to purchase a home, you may find that your home is valued below your mortgage. In this case, you should find an agent who works with short sales. After you receive an offer, your agent can help you work with the bank to determine the terms of the short sale.
When people ask the question “What is a short sale?” they also want to know: “Will it hurt my credit?” Your credit will still be hurt by a short sale, but it will be in much better shape after a short sale compared with a foreclosure. For one, there won’t be a trail of the delinquency notices and late fees associated with a foreclosure.
In a short sale, lenders consent to permit you to accept an offer for an amount that is less than the total you owe on your loan. You will still be charged with making up the deficiency, or the difference between what you can get in the sale and your loan, but because of the sale, this amount is reduced. Not all lenders allow short sales, but the current market has increased the willingness of many banks to negotiate in this regard.
Keep in mind a few things about short sales. Like foreclosures, a short sale can be long and exhausting process. Most lenders will only sign off on a short sale if you have been sent a notice of default. In the case that you declare bankruptcy, it’s highly unlikely that a lender will agree to a short sale. Remember, though, that lenders have never experienced a market like the current one, so many hard-and-fast rules of the past are more flexible now.
If you are wondering—What is a short sale?—you might already know that you are going to lose your home. Though this is, of course, sad, a short sale might be a better alternative to foreclosure because it causes fewer credit woes and increases the likelihood that you will own another home soon.
In the wake of the turmoil caused by the global crash of the housing bubble, the government has been advocating loan modification programs, which are designed to encourage banks and other lenders to offer more favorable terms to borrowers with existing loans.
The housing bubble saw many homeowners take advantage of unprecedented loan opportunities. Lenders bent over backwards to hand out a smorgasbord of seemingly lucrative options like adjustable rate mortgages to homeowners. However, as we all know, the roof fell in rather quickly, and homeowners were left in desperate straits with sky-high payments due and on the verge of foreclosure. Many distressed homeowners started looking into bankruptcy facts, wondering whether bankruptcy was the best option.
Loan modification programs are based on the premise that the already-struggling banks may benefit by seeing these borrowers pay back some money rather than face a complete loss. Helping these homeowners avoid bankruptcy and foreclosure means the banks will get something rather than nothing.
Loan modification programs are a bankruptcy and foreclosure fix for many besieged property owners.
Most loan modification programs are based on reducing interest rates or payments for a period of time or even giving borrowers a complete break on interest payments for a few years. In other cases, a bank may renegotiate the terms of your loan; for example, you may be able to switch from an adjustable rate mortgage to a fixed rate mortgage based on your circumstances. Theoretically, loan modification programs can help delinquent homeowners achieve a semblance of stability and pay off the remainder of their loans.
The first step in the loan modification process begins with you picking up the phone and contacting your bank’s hardship department. You will need to divulge your income and explain the circumstances that are preventing you from making regular payments on your loan. Your lender can tell you whether you qualify. Most loan modification programs exist for people who have already defaulted on at least one payment. If you are making timely payments, the banks might be reticent to modify your loan, figuring you can continue to stay current on your loan and they can recoup 100 percent of the loan.
All modifications you might make to your loan will be conducted through your lender and not via the government. And because the loan modification program is only encouraged by the government, not all lenders have chosen to participate. As I mentioned, some loan modifications may be available only if you have been tardy on your payments, though I have heard of a few available for people who have never been late. Keep in mind that some loan modificationprograms may be subject to fees based on the type of alteration requested, so get all the information before you make a decision.
No matter how dismal your financial situation, you might be able to find a way to retain your house and prevent a dreaded foreclosure through a loan modification. This might be a wonderful option for you, but its availability will depend on your lender and its willingness to work with you. Call your bank’s hardship department to see if you are eligible for a loan modificationprogram and if so, what type of program might best benefit you. An important thing to keep in mind when you talk to your bank is that the economic situation is changing faster than we can predict. What might have been valid yesterday may no longer be available tomorrow. If you are turned down for a loan modification, try again in a month or two.
Foreclosure, Bankruptcy, and Short Sale on Credit Report
Credit Bad, How to Build Credit, Credit Score
Question submitted by Mike Lavios, Lake Oswego, OR
Question: How long will the following stay on a clients credit report? – Foreclosure, Personal bankruptcy, Business bankruptcy, Short Sale
Mike – here is your answer:
– Foreclosure – 7 years
– Chapter 7 BK – 10 years
– Chapter 13 BK – 7 years
But remember, you do not need a clean credit report to have a high credit score. The key is to reestablish your credit from the beginning, if you do that, your credit score will jump quickly. As I say often, if you reestablish your credit the right way, you will have a 720 Credit Score 7-8 years before the bankruptcy falls off your credit report.
Foreclosure, Bankruptcy, and Short Sale on Credit Report
Credit Bad, How to Build Credit, Credit Score
Credit Bad, No Credit Score, How to Build Credit – Question #2
Question Submitted by: Jan, Slidell, Louisiana
I refinanced our home into a poor loan with Countrywide. Our loan is now with Bank of America and we are two payments behind. Our credit is bad, any solutions?
Jan – Thank you for your reaching out, and I know how difficult it can be when your credit is bad and you feel you have no options. It’s impossible to give you all your options with this information; however, here are a couple thoughts:
1) Your bank will not tell you this, but as long as you are paying any part of your payment, your bank will not negotiate with you on your loan modification. Myself and too many of my clients have gone through this – when you pay your bills, you don’t qualify for these programs. The irony of that statement amazes me every time I say it.
When dealing with the banks on the loan modification, be very nice (I guess most people with credit that’s bad are not that kind) and keep asking them for a solution. The banks are so overwhelmed that they cannot keep up with the requests they have and you won’t get their attention if you are paying.
2) There is no way around it; at the end of this process you will say, “My credit is bad.”
3) Your bank is going to tell you that you will be “unlendable” for 7 years because of credit bad. That is false. If you understand how to build credit, you can have a 720 credit score 5-6 years before those late payments fall off your credit report.
The key is to reestablishing your credit score is to start now. Also, don’t beat yourself up about this process, we have all had learning experiences over the past two years, and this too shall pass.
Credit Bad, No Credit Score, How to Build Credit – Question #2
How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 3
I’m excited about this week’s update to my eight-part series—How to Build Credit Before You Buy a Home or Make Another Major Purchase! Today’s lesson in how to build credit comes straight from Step Two of my book, 7 Steps to a 720 Credit Score. Step Two is: Have at least three revolving credit lines.
Credit bureaus give higher scores to people with three to five revolving credit card accounts, which include major credit cards such as Visa, MasterCard, American Express, and Discover, as well as store-specific retail cards, such as a Macy’s card, Chevron card, Gap card, etc. If you do not have at least three active credit cards, you should open some.
But, there’s a caveat: Open three major revolving credit cards, not three retail credit cards. If you have retail credit cards, be sure to read my article entitled, “Retail Credit Cards.” In short, this article explains that:
- Retail credit cards are not the best credit cards to help you along your path to learn how to build credit. Credit-scoring bureaus respond most favorably when people have three to five credit cards, so why waste one of them on a card that can be used only at specific stores.
- These credit cards often end up costing you more than you will save with the one-time discount you might receive when you open the account.
One thing to keep in mind when opening new credit cards and learning how to build credit: You credit score will initially take a hit when you open a credit card. The credit-scoring bureaus use a formula to calculate credit scores, and 10 percent of this formula considers inquiries by lenders into your credit score. Anytime you apply for a credit card, the credit card company will make an inquiry into your credit score, so your credit score will drop a bit at first. Don’t worry! Just know that in six months, your credit score will start to rebound, so long as you keep the balance below 30 percent and pay your bills on time. For this reason, if you have to open more than one card, open them all at once. Don’t prolong the agony! If you open one now, and another in six months, you will have to wait a year before your score starts to build. If you open them both now, your credit score will start to climb within six months (so long as you implement all the other steps).
If you have poor credit, you might not be able to open a typical credit card. In this case, consider opening a secured credit card. Lenders that offer secured credit cards will require you to make a deposit that is equal to or more than your limit, thereby guaranteeing the bank that you will repay the loan. If you do not make your monthly payment, the deposit is applied toward your balance.
Another option for borrowers with poor credit is to be added as an authorized user to an existing account in good standing. Authorized user accounts help you borrow a family member’s positive credit history while you learn how to build credit on your own.
If you have more than five credit card accounts, do not close the accounts. Most credit experts agree that once you have opened the excess accounts, the damage is done. In fact, closing them might hurt your score and will never help you if you want to learn how to build credit. If you have more than five credit cards, we sure to read the blog called “Closing Credit Card Accounts” so that you know exactly what to do if you have more than five credit cards.
Be sure to come back next week for the fourth blog post of my eight-part series: How to Build Credit Before You Buy a Home or Make Another Major Purchase. And, don’t forget to register for my free teleseminar that teaches you how to negotiate with banks for lower interest rates.