Bad Credit

18 Replies

Hello,

I have bad credit and i'm having trouble getting financed to buy my first home. I'm wondering if I were to buy a home outright (in cash) would it be easier to get a loan to fix it up? I don't even qualify for an FHA loan with my credit score. I'm working on building my credit but because i'm so young and my credit is just 6 years old with some bruises from college it's taking much longer than I'd hoped for. I'm employed full time and i'm ready to get started building my investments. Does anyone have creative financing ideas?

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Personally, I would focus on rebuilding your credit first.  I know that isn't necessarily in-line with the bigger goal, but focusing on that will help you more in the long run than probably that first deal will (unless you're really good/lucky and hit a home run?).

6 years of credit is PLENTY to get a good loan.  So I would re-look at why it's bad in the first place, make sure you took care of everything detrimental, and work on building good credit in whatever way you can.

Originally posted by @Chanel Oldham :

Hello,

I have bad credit and i'm having trouble getting financed to buy my first home. I'm wondering if I were to buy a home outright (in cash) would it be easier to get a loan to fix it up? I don't even qualify for an FHA loan with my credit score. I'm working on building my credit but because i'm so young and my credit is just 6 years old with some bruises from college it's taking much longer than I'd hoped for. I'm employed full time and i'm ready to get started building my investments. Does anyone have creative financing ideas?

 Hey Chanel,

Feel free not to answer this but, what kind of negatives are causing your low credit score? Is it late payments, collection accounts, debt to income? In my experience if you are below what the FHA requires for a loan (580 i think is the minimum) there is usually a way to get your credit score above that threshold in a time frame similar to similar to finding a home that is in your cash budget and then getting a loan, most likely at a very high interest rate if your credit score is still low, to fix it up.

If you have a little cash on hand, and you have a 3 or more collections on your credit report, you can easily bump your score by 25-50 points by offering the collection agencies pay for delete arrangements. Essentially you negotiate a payoff with the collection agency and send them the funds in exchange for them DELETING the record from the 3 reporting agencies. This works for them because they buy debt at around 5% of initial debt value, and it works for you because the record is removed from your credit score. It doesn't show as paid, or settled, or closed, the record is deleted. 

There are other ways to improve your credit score, and the lower your score is often the easier it is to improve. Its funny but if you have a 550 score its much easier for you to get to 650 than it is for someone with a 650 score to get to 750.

Just an alternative to going with non-traditional financing, which i have seen work out very well and very poorly. I always recommend researching how to improve your credit score first, it will always give you more favorable terms and rates, and you can walk away from a bad deal, you can never walk away from your credit score.

Adam

If you can come up a down payment and your debt to income ratio is reasonable you may be able to purchase a home with seller-financing. A licensed loan officer will be able to tell you how much house you can afford. Most sellers are concerned with the ability to pay the note and if you're paying your current debt. I've seen people with bad credit due to medical bills and judgments, they pay they're monthly bills on time and are great homeowners. The note payment helps build credit and you work on the other debt. Hopefully you can refinance at some point in the future. 

Bad Credit Real Estate Investor - Bad Credit Real Estate Entrepreneur

I've title this "bad credit real estate investor bad credit real estate entrepreneur"

Let's talk about where you need good credit

To get a car loan, to get an FHA loan or conventional loan, even to get a good job with the US government, your credit report is important.

There are two ways to improve your FICO score, get rid of negative marks, and to put new positives on.

To get old bad marks off, I would study on the http://FTC.gov site the "Fair Credit Reporting Act", which basically says that you can contest any mark on your credit report.

Ask them to investigate its accuracy, and from there, the creditor or reporter to the credit reporting agency that has the negative mark has a reasonable amount of time to do two things: one, check for its accuracy and to report its findings to the credit bureau, which are three companies. The list of credit bureaus and it's addresses to contact them are on the FTC.gov site. see

http://www.consumer.ftc.gov/articles/0155-free-cre...

What's reasonable? 30 days.

So what if they don't answer after you've written to the creditor on the credit report? 

 If they don't answer, you write another letter that states that you given a reasonable amount of time and the mark is still on your credit report, and then ask them to respond to you within 10 business days, if they do not, you will write a complaint letter to the Federal Trade Commission.

In 10 days write a letter to the Federal Trade Commission.

Many people don't realize that the number one complaint to Federal Trade Commission is problem on credit reports of consumers.

Federal Trade Commission gives out fines for people that don't fall the fair credit reporting act, I think it's $10,000 per occurrence.

So, if you want to clean up your credit report first contest negative marks.

If it comes back verified, I would get a debt negotiator, and you need to get at least 70% of the debt to offer them the money in exchange they help you clear up your report.  See

http://upgrademycredit.com/services/


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so what if your credit ghost? You have no credit? 

 Or your bad credit and you want to build up new credit marks to counterbalance the negative?

Well to establish new credit, the first thing I would do is borrow some money from somebody, like $1000 cash.

Then what I would do I would do what's called Bank Round-Robin


1. Take $1000 and see the manager for consumer loans of a major bank like Bank of America or Wells Fargo or Chase or Citibank.

Ask them to consider you for $1000 personal loan with $1000 security in a CD. Tell them this is strictly to build up a credit rating to show that you can pay your loan back on time.

2. If they give you 12 months to pay back the thousand and $80 a month or whatever, then double up on payments and pay $160 month, and then 

3. In six months you now have three marks on your credit report from that bank: "open credit line", "paid as agreed", and then "paid satisfactory".

The should bump your credit report up 50 points.

It's called Bank Round-Robin because you going to do it twice. 

Put the thousand dollars into "Bank One", then they give you the thousand back, then take the thousand and put into "Bank Two", they give you thousand back, you double up on payments every month, and in six months you get to paid as agreed accounts.

This is literally the fastest way for you to get new positive marks. 

Does it get rid of the negative ones? No. You still need to do that credit cleanup as talked about above. And not all of them are going to come off, and you shouldn't care about that.

What you should care about is creating new positive marks that create enough points to bump up your FICO score.

The best advice on keeping your Credit Rating Strong is this artice from MyFICO.com
http://www.myfico.com/CreditEducation/ImproveYourS...

On your credit cards it's important to understand that just a couple of cards with balances that are 30 to 40% of maximum, that are paid on time over 24 months will really help your score. 

What doesn't help is if you're maxed out at 100% of your limit all the time, or you go over limit at all. It's like a "credit usability score", or how you use your credit when you get it.

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How do I make money in real estate if I've declared chapter 7 or 13 bankruptcy, or have a serious problem like an IRS tax lien?

I love this question because you can make money in real estate without any credit of all or any banks at all.

When I was first starting out, I did not have BAD credit, I just had NO CREDIT.

 I was fresh out of the Marine Corps.

I didn't have a lot of job history, but I did work for a real estate investment company, and my job was to be the acquisitions manager, talking with home sellers about selling their homes.

I paid cash for everything. I think in the '80s we didn't even have debit cards, just cash.

I was making about $500 a week, so I did the Bank round-robin thing (see above), deposited a thousand bucks in a CD, got $1000 loan, paid it off in 6 months, then applied for Visa or MasterCard through the bank unsecured.

But to get back to bad credit and how to make money in real estate.

If you go to buy your commercial banks you're going to need a credit rating with a good FICO.

And you are going to need 20% down if it's an investment property or 3% down through FHA programs up to four units.

That said, how can you make money with BAD credit?

Well, here are some creative ways to make money with terrible credit.

1. Sub2 Purchase
2. Lease Options - Sandwiches and Assignments (also called wholesaling lease options or corporate assignment lease options)
3. Wholesaling flipping
4. Wraparound mortgage Purchase (aka AITDs)
5. Master lease options (small apartments)

Here's my advice if you have terrible credit:

Don't be real estate investor in the traditional sense where you need great credit

Be a real estate entrepreneur where you solve a problem for the home seller


The biggest problem right now for sellers is to have "no equity"

Pretty houses with no equity are great opportunity for entrepreneurs with terrible credit to make some money

Here is an example:

Expired listing, house comps out at 500,000, they owe for 490,000, basically no equity, it was expired because they listed the house for 550,000 and nobody saw the house (over priced house is #1 reason for exprireds, like 80% of the time)

Have you got no credit or bad credit and you can't get financing yourself, why not solve the problem for the home seller? How to solve the problem seller?

Well this is what I do.

One, get an expired listing, knock on the door of the home seller, give a free report about lease to own, how lease to own works, why it helps them sell on terms versus for cash, how it helps them save money by not paying a real estate commission or closing costs.

Two, follow up with these expired listings, many need to think about it for a month, if you follow up, you will eventually get sales.

Three, when presenting to homes with no equity, you want to go through all your choices, so what I do is I present three columns, and basically talk about the cost to sell in the first column with an agent, which include, real estate commissions of 6%, closing costs that 2%, sellers concessions which can be 3 to 6%, vacancy costs which can be 4 to 6 months while an agent tries to sell a vacant house, and the seller still have to pay PITI, and lastly spruce up costs like paint, carpet, landscaping, etc. to compete with all the other $500,000 houses. I explained to the no equity seller that many buyers are very picky, and they wanted repair things that you don't want to repair as a seller.

The worst part about selling with an agent with a "no equity house seller" is this...The Seller has to pay to get rid of the house!! 

This amount that you have to pay is generally 10% or more. Sometimes it's 15% of the value of the house. 10% on $500,000 is $50,000. If the Seller owes $490,000 on a $500,000 house Seller has to pay $40,000 and get rid his house!

So what else can you do if you don't want to sell with an agent and pay the costs to sell?

In the middle column I write "hire a property manager", and pay 7% the 10% of collected rent.

Then you need to get landlord insurance, and generally prepare your house for a rental. Many nice houses are not treated well when rented out the tenants. There is risk of damage well over the security deposit of 1 month's rent. There is also risk that the tenant may not pay you on time or pay you at all, then you need to hire an attorney, and go through an eviction. You still to pay your PITI while you are evicting the tenant which sometimes takes a while... up to two months or longer.

Lastly, I generally say, in the state of California where I live, but you could say in a state of ____, there are a few creative solutions.

The first creative solution is let somebody live in your house for a while, pay market rent, and then buy the house down the road as they work on their credit rating and decrease their debt.

I show the home sellers that have "no equity" how difficult it is to get a mortgage today, because the new laws from Dodd Frank in the safe act have tightened up mortgage origination.  In fact over 45% of mortgages that are applied for it tonight right now, mainly due to the 43% debt to earnings ratio. 

People simply have too much consumer debt to get a mortgage, and they need to pay down some credit cards usually.

So how can be a win-win between the no equity seller and the homebuyer that just gets turned down because of credit or debt issues?

And how can you make money with this, the bad credit entrepreneur?

I generally explain to the home seller that they'll make more money if they do a lease to own than trying to sell the house with an agent. The costs to sell are much less because there's no commission and no closing costs as the buyer pays closing costs.

I do tell them how my business works.

I enter into an agreement with you the home seller, as a principal and not as an agent, and the documents include a lease and an option, and then my job is to find a buyer and assign that paperwork or sell my interest in the paperwork.

There is no fee to the seller.

Let's talk about my bad credit and lease to own. 

If I am providing a solution for home seller, where they're going get their house sold at top price without an agent and without closing costs, that home seller NEVER ASKS ME for my credit rating. Period, never has in 30 years of creative financing with sellers.

Now let's talk about subject to and wraps.

If I buy and subject to the existing financing or wraparound mortgages, there's no credit pulled.  NEVER.

For people new to subject to it means that you're buying the property "subject to the existing financing". The loan stays in their name, and you make payments from your bank account directly to the bank of the mortgage. You also pay directly insurance and taxes.

And when you buy on a wraparound mortgage, existing financing is kept in place, and a new mortgages wrapped around the existing financing. Also, the loan stays in their name, and you make payments from your bank account directly to the bank. You also pay directly insurance and taxes.

Note: there is a due on sale clause with a wrap and a subject to transaction, and many times a property trust is used.

Due on sale clause means that the bank has the right to call the loan due, but if the payments are paid on time, religiously, there is no real reason for the bank to call the loan due on performing, "in good standing" asset.

Here's a business plan for bad credit entrepreneurs:

One: understand that your bad credit is not stop you from operating a real estate business.

Two: if possible get licensed sometimes bad credit prevent you from getting licensed. If you can't get licensed because your bad credit, have licensed agents in your LLC, so you can at least tell the real estate report that you have licensed agents in your company.

Three: work especially with expired listings, because they are more open than anyone to creative solution such as lease to own, sub2, and wraps.

I have saved the last paragraph for the best information: how do I get paid?

You get paid a lease to own or wraparound mortgage or subject to in different ways.

Lease to own where you enter into a lease an option with the seller, then assign that deal, usually make 3%. 3% on $500,000 is $15,000.  Nice check!  Cheaper markets, 3% on hundred thousand is $3000.  So do a few of them!

Subject to and wraps you're buying the property in your name (your LLC). 

When you buy the property in your name, you want the ability to sell the contract. So tell the seller that you are going to sell the contract.

Or if you don't want to sell, keep the contract and rent the property out or lease to own the property out.

Caution: do not do properties on wraps or subject if the numbers don't make sense

Example: buy subject to, PITI to the bank = $1000 per mo, rent is $1000 per month, $0 positive cash flow.

Yuck! You still have maintenance to pay, and if you have to foreclose and get property back, that's some real money, because you still have to pay the underlying lien.

So get a great positive cash flow and buy some equity was subject to and wraps.

The way I look at real estate rentals, it costs 10% to sell, so that is my Zero Mark.

What that means is $100,000 property today is really worth 90,000 to me with no equity.

So in order for me to be interested I need st least a 20% equity position to buy on a wrap or subject to.

That may not be everyone's benchmark.

So this long post talks about bad credit and how to improve it, and also talks about being a bad credit real estate entrepreneur not a bad credit real estate investor.

There many other things you can do with bad credit credit: I love helping sellers that have a mild rehab, say $300,000 house, needs 20,000, but just updating bathrooms and kitchens, the roof is fine, foundations fine, HVAC is fine, paint and carpet is fine, just bathrooms and kitchens.

I will do a JV with the seller, basically saying to the seller,
if you can not afford to do the rehab work, we can work as partners and use my money and my company's labor to do the work, then sell the house, then we'll get the money out when it sells.

This is an advanced concept, "JV with the seller", but the seller makes more money by doing it this way been doing that 65% of ARV less repair costs of wholesalers.

In closing, 

Best of luck everybody that has bad credit and go make some money!

Maybe @Brandon Turner @Michael Carbonare  

@John Jackson @Misty W.

can say a few words about "Bad Credit Real Estate Entrepreneurs"

Try creditkarma.com for free and see any of the negative that is keeping your score down. It's a good way to start rebuilding your credit.

I have no affiliation with them. Just my opinion.

Nathan 

Great information @Brian Gibbons . I am unable to agree about paying debt collections. Collections are derogatories and it does not help FICO score. Collection debt is worthless and can be challenged and not valid debt. Never pay a collection agency and never consolidate collections. 

I suggest a secured card with your local bank. 

In regards to cleaning up your report, the CRAs are not consumer friendly and items are not really verified as valid according to Section 609 FCRA. So items should not be on the report that are not verified. Even if the CRAs state it is verified, Section 609 states otherwise FOR the consumer.

You can be a real estate investor and get sfh under option contracts and then assign to buyer. It works and it does not matter about your credit. However, building your credit is freedom to choose how you live and be motivated by that statement. 

Owner financing or rent to own is a great way to build credit AND buy your first home!

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FHA with accept lower credit scores with compensating factors like low DTI, LTV, or reserves. I would reach out to a broker in your area and find out if they have lenders they use that do not have additional credit overlays.