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I'm fairly new to the idea of buying a house. Here's my unique situation: I have a lot of debt. Mostly student loans but my debt to income ratio is high. However, renting is getting increasingly expensive and in my area there just aren't many affordable rentals. I have virtually no savings.
Naturally, I understand my odds of getting a nice, average priced home is going to be nil. High debt-to-income ratio, no savings for a down payment, etc spells bad news.
But, I also happen to live in an area with very cheap home prices. A nice house (but not a very nice house, if you know what I mean) can run about 80-100,000. A lot of my friends have purchased decent houses for 30-40,000 and just fixed up things here and there on them.
For an equivalent house rental I'd be looking at 900 bucks a month, but most mortgage calculators show I could grab one of these houses for around $400-500 with mortagage/insurance and taxes thrown in. It's a no-brainer for me to buy, then. Even with the cost of fixing things like hot water heaters, plumbing, etc.
Do banks and credit unions bother offering mortgages for houses so cheap, and would they be more lenient since there's almost no way the house value drops even lower? If I can show I pay my rent on time, it's basically the same thing as a mortgage payment, would that help my case?
...happen to live in an area with very cheap home prices.
A nice house can run about 80-100,000.
Do banks and credit unions bother offering mortgages for houses so cheap...
Few want to bother. Locally owned banks, those most likely to hold the paper, are about it.
Quote:
I have a lot of debt. Mostly student loans but my debt to income ratio is high.
Start banking at one of these locally owned institutions.
AGGRESSIVELY work at eliminating your debt and cleaning up your credit.
As you get close to the end of that project approach the manager (who you should know by then)
Start up a conversation about their mortgage program.
1. Under a certain amount, they won't make loans at all
2. Under a higher certain amount, they will make "junior loans", but charge a higher interest rate.
3. Normal loans
4. Jumbo loans for large amounts.
My loan was $108k on my house, with Wells Fargo, and they considered that a normal loan. However, when I tried to refinance, my loan was down to about $85k, and they considered that a "junior loan", and so my interest rate wasn't as good as it should have been.
So I refinanced with a local credit union instead. During the process, I asked them if the rate I was being quoted was for a junior loan (aka baby loans) and they said they don't even have a junior loan limit, and there was no premium.
So a credit union or small local bank is definitely the way to go. I didn't even have an account with them ahead of time, but then I had 25% equity and perfect credit. You don't, so a prior banking relationship would definitely help.
But right now, you have bad credit (even if you pay all your bills, the high DTI and just high debt load are a problem) and no savings. So, along with the junior loan, that is 3 strikes against you. Lenders right now are not looking for reasons to say yes. They are looking for reasons to say no. And you have them in spades. Paying your rent on time isn't really a factor, since they will require that anyway. But at least it isn't another negative against you.
So right now, you probably aren't going to get a loan.
Get a second job and work hard to pay off as much of your debt as possible while also saving up at least 3% for a down payment. In some markets, sellers are typically paying closing costs. If yours isn't one of those, you'll need about another 3% to cover that (possibly more than 3% on a cheap house, since some expenses are fixed, the percentage goes up when the price goes down). Finally, the bank is probably going to want to see that you have reserves, and even if they don't, you should. At least 3 months worth of living expenses.
Don't forget that if you aren't putting 20% down, you'll also have to pay PMI, which the mortgage calculators don't include. So your payment will likely be higher than you are thinking.
there are millions of individuals with major debt problems across the country just like you.
My advice to you is stop being a dreamer and focus on reality. Before you start trying to understand the qualifications for bad loans that you will be charged more and have higher monthly payments.
Simply stated - You think you have major debt problems now, why do you want to go into a worst situation?
First learn how to schedule yourself.
Learning money management focusing more at what comes in to want is going out (credit unions are a start with less fees and higher interest rates). Start saving $25, the next month $50, then $100...
Work on investing in yourself with new education and skills.
Networking - < major important!!!..
..
Last edited by Modification Specialist; 01-28-2015 at 11:41 AM..
I second the idea of joining a local credit union if that's a possibility. I bought my first house in 1985 through my credit union at the Naval base where I worked. The house cost $16,000 and my annual salary was approximately $14,000 (I was a GS-3 at the time.) Although I had no debt, I also had no savings, so the credit union not only financed the 12-year mortgage, but rolled all the closing costs into the loan as well. That was truly a sweet deal. And although it was a tiny beachside home, it was in very nice condition - I bought it from my landlords, who had fixed it up before I even rented from them.
If you have no savings, you can't afford to buy. How will you pay for the new roof, new furnace, new hot water heater, whatever else breaks?
Can you realistically expect to be able to pay off your student loans with your income? If so, then cut your expenses to the bone. Rent with roommates - one per bedroom in a house. Find extra work and pay off the most expensive debt first - credit cards, car loan, whichever is highest interest rate. Spend nothing. Figure out if the student loans can be consolidated to a lower interest rate. After the high interest rate debt is paid off, start saving up a down payment while continuing to pay off the student loans.
If your student debt looks like you will never be able to pay it off, you may never be able to buy a house. Honestly, if you're in that situation (and of course it's too late to fix that), you might consider paying the student loan off by planning a bankruptcy. You can't declare bankruptcy on student loans - but you CAN on credit card debt. You could get as much credit as you can qualify for, at the lowest rates possible. You'd be amazed how much credit cards will lend you, as long as you continue to pay the monthly minimum. Live frugally off the credit cards and put your entire income toward the student loans, while continuing to pay the bare minimum monthly payment on the credit card debt. You will build up a great deal of credit card debt, but if you live frugally and put as much of your earnings as possible toward paying off the student loans, perhaps you can get rid of them, and then declare bankruptcy once the credit card debt exceeds the amount that will allow you to simply escape it in a bankruptcy. You might be able to string it along this way long enough to buy that cheap house for cash, and of course be sure to have a good, young, paid-off car, too, since you're allowed to keep your home and your car when declaring bankruptcy.
It's not an honorable way of handling it. But then again, neither is 24% interest on credit cards offered so freely to anyone who can sign their name.
If you have no savings, you can't afford to buy. How will you pay for the new roof, new furnace, new hot water heater, whatever else breaks?
Can you realistically expect to be able to pay off your student loans with your income? If so, then cut your expenses to the bone. Rent with roommates - one per bedroom in a house. Find extra work and pay off the most expensive debt first - credit cards, car loan, whichever is highest interest rate. Spend nothing. Figure out if the student loans can be consolidated to a lower interest rate. After the high interest rate debt is paid off, start saving up a down payment while continuing to pay off the student loans.
If your student debt looks like you will never be able to pay it off, you may never be able to buy a house. Honestly, if you're in that situation (and of course it's too late to fix that), you might consider paying the student loan off by planning a bankruptcy. You can't declare bankruptcy on student loans - but you CAN on credit card debt. You could get as much credit as you can qualify for, at the lowest rates possible. You'd be amazed how much credit cards will lend you, as long as you continue to pay the monthly minimum. Live frugally off the credit cards and put your entire income toward the student loans, while continuing to pay the bare minimum monthly payment on the credit card debt. You will build up a great deal of credit card debt, but if you live frugally and put as much of your earnings as possible toward paying off the student loans, perhaps you can get rid of them, and then declare bankruptcy once the credit card debt exceeds the amount that will allow you to simply escape it in a bankruptcy. You might be able to string it along this way long enough to buy that cheap house for cash, and of course be sure to have a good, young, paid-off car, too, since you're allowed to keep your home and your car when declaring bankruptcy.
It's not an honorable way of handling it. But then again, neither is 24% interest on credit cards offered so freely to anyone who can sign their name.
The bankruptcy courts have gotten wise to this trick. They look back several years at your history. If they see someone pulling this trick, they will just deny the bankruptcy altogether.
there are millions of individuals with major debt problems across the country just like you.
My advice to you is stop being a dreamer and focus on reality. Before you start trying to understand the qualifications for bad loans that you will be charged more and have higher monthly payments.
Simply stated - You think you have major debt problems now, why do you want to go into a worst situation?
First learn how to schedule yourself.
Learning money management focusing more at what comes in to want is going out (credit unions are a start with less fees and higher interest rates). Start saving $25, the next month $50, then $100...
Work on investing in yourself with new education and skills.
Networking - < major important!!!..
..
Many people would say a person in this position "can't afford to buy a home". I regard this scenario as "can't afford to NOT buy a home". In case you hadn't notices, rents do not go south, and today are rapidly going north. Buying a home is the only way to escape the rent treadmill.. I would gladly trade short-term pain for long-term relief. After a couple years with solid payment history you've got a seasoned loan and can refi at reasonable rates.
If your debt to income/credit is really that questionable you should be happy you found a landlord to RENT to you.
??? Poor people and those in debt rent all the time, money talks.
I've paid more than 50% of my income on rent for over ten years now.
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And although it was a tiny beachside home, it was in very nice condition - I bought it from my landlords, who had fixed it up before I even rented from them. 
