SPECIALREPORT H o w T o b u y a H o m e

W H E N B A N Ks W O N T L E N DAlternative Options for Purchasing a Home and Improving Credit Scores

SPECIALREPORT H o w T o b u y a H o m e

W H E N B A N Ks W O N T L E N DAlternative Options for Purchasing a Home and Improving Credit Scores

For some people, the lack of responsibility required in renting or leasing is exactly what they’re looking for.

But for others, people who have heard, read, and dreamed about owning their own piece of the American pie, this isn’t a long-term option. They want to own their own home, be the master of their castle, and when the time seems right, they begin the process of purchasing their own home.

Sometimes this goes smoothly enough but other times the credit investigations and paperwork make the American Dream seem more like the American Nightmare, especially if the new home buyer has less than perfect credit.

If you are one of those people, never fear; you are not alone. There are several ways to get around this problem legitimately.

The most profitable ways include

working with a private lender/

seller or owner financing, and of

course, improving your credit score.

Seller or owner financing was a popular way to become a home owner during the 1980’s and with the shrinking economy, it’s becoming a popular choice again but with a few variations to make it even more appealing to both the owner and the new home buyer.

Seller and owner financing, while they sound like the same thing, are actually two different options available to the homebuyer who hasn’t made the bank’s “nice” list.

In owner financing, the buyer is most often dealing with the individual owner of the house, usually someone who has built up some equity and is able and willing to finance the new buyer themselves.

Seller financing is usually funded by a third party, often a realtor’s company, in order to provide another viable option to home buyer’s with less than perfect credit. They both function in similar manners.

The first thing to realize when considering using seller or owner finance options is that they are not a bank.

While they may offer lower down payments than a major financial institution (some of them are now asking for as much as a 20 percent down payment)

they will still probably require at least 10 percent.

After all, they generally can’t survive as big of a hit as a major banking corporation can if the deal should fall through. They are also likely to charge interest rates that are slightly above market rates because of the extra risk they are incurring.

Balloon payments are another variable to consider when looking at this type of financing. It is customary for the payments to start out at a lower rate for anywhere from five to fifteen years, then conclude with a large balloon payment at the end of that period of time for the balance of the loan.

Generally at this point, the homebuyer is hopeful or expected to having a better credit score, and the option of using bank financing to cover the balloon payment becomes a possibility.

That is one reason it is important to continue to work on improving and correcting credit scores during the duration of the early part of the loan.

While working with a private owner/seller as a lender may seem less complicated than going through the more common banking route, it is important to practice due diligence.

Unless the homebuyer is an expert in the financial arena, it is important to work with a qualified real estate professional. It may be necessary to obtain the services of a Broker or Attorney when purchasing real estate

“...it is important to continue to work on improving and

correcting credit scores...”

through a private lender. No one can understand all of the legal terms used in purchasing contracts and escrow instructions.

Without official representation, not only will the documents be undecipherable, but the buyer will have no protection against possible future legal problems. The buyer’s agent can oversee all documents so that the arrangement is both beneficial and binding to both parties involved.

There have been many articles, blogs, and even entire books written to address the topic of improving poor credit scores. While there are various scams and schemes for improving scores practically overnight, most reliable sources agree on some key points:

• Obtain an official credit report. It is best to check with at least two of the big three reporting companies in order to verify the accuracy of the report. Clients are allowed to check their credit scores annually at no charge and can do so by ordering a report over the Internet or asking for assistance from their local bank or credit union. If the client is unfamiliar with a credit report, it is probably advisable to consult a financial institution for help deciphering the statement.

• Dispute and correct any errors on the report. Although there are some errors that won’t overly deteriorate your credit scores, others can have a big impact. These include: late payments or collections that aren’t yours, accounts listed as “unpaid” that were included in a bankruptcy, credit limits being reported as lower than they are, or any negative reports listed as unpaid that are over seven years old.

• If you don’t have a credit card, get one. Sound like crazy advice to a client with poor credit? It’s not. One of the best ways to improve credit scores is to have and use a credit card responsibly. Having a card that is used lightly and paid regularly can go a long way towards improving credit scores. If it’s difficult to qualify for one right now, a similar option is a secured credit card where your credit limit is equal to the deposit required for the card.

• Pay off balances that are past due. Payment

history makes up over one third of your total credit score. Try to get caught up on past-due payments before they are sent to a collection agency or written off. When in a bind, call and talk to the credit card company about missed payments. If you’ve been a good customer in the past, they may be willing to erase a few past-due reports once the account is current.

• Pay down any existing credit cards. This is one of the best and most effective ways to drastically improve credit scores. Lenders like to see a large difference between the amount of credit available to a client, and the amount that the client actually owes. Try not to carry more than a 25% balance on any given card, and the lower, the better. Many financial advisors would suggest paying off the card with the highest percent of interest, first. In this case it is better to concentrate on the card or cards that are closest to their limits.

• If you already have a line of credit, avoid new credit applications. Every time you apply for any type of new credit, the company extending the credit sends a credit report inquiry. This shows up on the credit reports and can affect them negatively.

• DON’T close unused accounts. While it may seem sensible to pay off accounts and close them, this is actually not a wise choice. Closing unused accounts without lowering your total debt won’t improve your credit score, and can, in fact, harm it. This is because your debt to utilization ratio changes. The same amount of debt is still there, but with a lower available credit limit. If overcharging is something of a struggle, destroy the card, but leave the account open.

By considering owner/seller financing and working to improve credit scores, the American Dream is once again feasible for more of the American people. While one solution may be quicker than the other, they are both valid and achievable resolutions for future homebuyers willing to put in a little extra effort.

Remember, if you need any help finding the perfect home for you, please feel free to contact me at the information below.

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