Getting a Non-Mortgage Mortgage?
March 17, 2010 9:23 AM   Subscribe

Our bankruptcy is less than 2 years old, but we are trying to get a mortgage. Contract-for-deed or rent-to-own will not work, so don't suggest those. Everybody, whether a bank or a mortgage broker, says "FHA requires 2 years post-bankruptcy before we can lend to you," but is my only option really to wait?

The landlord is selling the house we're renting; both he and I would like my family to be the buyer. The biggest pain is that we have 7 years' history of paying way more rent now than we would on a mortgage for the same house, so it's not like we'll have trouble keeping up on our mortgage payments. We get roadblocked at every turn when looking for purchase options, so it looks like we're going to have to move out before he can sell it -- unless we can get a loan somewhere.

So, what options are there to borrow against a home purchase, without it being the "mortgage" that everyone says we can't have? Please do not say contract-for-deed or rent-to-own, those are not options.
posted by AzraelBrown to Work & Money (11 answers total) 4 users marked this as a favorite
Can he hold off until you meet the two year minimum? When you say "less than two years" do you mean 18 months or two weeks?
posted by Oktober at 9:31 AM on March 17, 2010

If you can't get a mortgage now, and rent-to-own and contract-for-deed are not options, then your only recourse is to find someone willing to lend you the money privately, i.e., a wealthy friend or family member who is willing to write you a promissory note.

To be frank, credit is rather hard to get these days, even for those with excellent credit, which someone only two years removed from a bankruptcy does not have.

So, short answer is: yes, your only option is to wait for the bankruptcy to recede into the distance and the credit markets to loosen up.
posted by dfriedman at 9:34 AM on March 17, 2010

You could try getting people you know to lend to you, and even use online servicing so that you pay a check to a single entity, and they dole out money to your friends & family. One apparent example I just got from random googling is virgin - though looks like their loans are restricted to one borrower and one lender per loan. There are also sites for general social lending like prosper or lendingclub, but with such a recent bankruptcy I'm not sure you'd get through the screening process - plus they have maximum loan amounts of $25k.
posted by lorrer at 9:36 AM on March 17, 2010

Part of the fallout from the sub-prime fiasco is that everyone is now a stickler for the rules when it comes to giving out loans, so your odds of getting an FHA loan are nil if they have a two year rule.

There are lots of variables in the equation. Remember, most people are incredible flakes, so your landlord is saving a ton of time, money and effort by selling directly to you instead of putting the house on the market and rolling the dice. His reasons for selling are important here. If he is just tired of it and ready to let it go, see if you can incentivize him to wait by maybe paying a little extra every month. If he's selling it because he needs the money, ditto. If he's try to stop-loss the price of the house in a declining market, see if you can write up the arrangement for the price now, but to be sold in 6 months (or whenever) so he's certain he'll get his current asking price even if the market goes down.

Could you get a family member (or someone who isn't two-years out from bankruptcy) to co-sign?

Really, the distance to your two-year mark is the biggest factor, so you should let us know what that number is.
posted by jeffamaphone at 9:46 AM on March 17, 2010

What's going on here is that the Federal Housing Authority, which provides mortgage insurance, requires you to wait two years after your bankruptcy to get another FHA-guaranteed mortgage.

This is distinct from but related to getting approved for the mortgage itself.

Mortgage insurance pays the mortgage company if you default and they can't recoup their investment through foreclosure. This significantly lowers the risk of mortgages, as if the federal government defaults on its obligations we're basically all screwed anyways. While typically required in situations where you can't come up with the 20% downpayment, but what seems to be happening here is that banks are saying that you aren't a risk worth taking without mortgage insurance.

Unfortunately, the FHA is the cheapest source of mortgage insurance, as they're backed by the federal treasury. Private mortgage insurance (PMI) can be pretty expensive; $50-80/month isn't impossible. That ain't chump change. $100k in principle at 6.5% over 30 years is about $630 a month (without taxes or insurance), so we could be looking at 5-10% larger payments.

See if you can find a broker who will talk to you about a non-FHA source of PMI. You may find that you can in fact qualify for a mortgage, but you may also find that it isn't worth it.
posted by valkyryn at 10:05 AM on March 17, 2010 [2 favorites]

Sorry: bankruptcy was completed Feb '09, so we're maybe 13 months into it.

Without disclosing too much of my landlord's private finances in a public forum, he's at a point where he just has to get the house sold and that's that. We have to move out at the end end of April regardless: he gave us 60-days notice a couple weeks ago so he can repaint, recarpet, etc, in anticipation of selling it this summer. The most we could delay is maybe a month or so if we've got no place to go (landlord is a nice guy), but that's not enough to make a difference if bankruptcy is the key.
posted by AzraelBrown at 10:07 AM on March 17, 2010

Have you talked to a credit union? Sometimes those have more flexibility.
posted by TedW at 10:08 AM on March 17, 2010

A broker will be your friend in your situation... they can get very creative about sources for funding. Ask around for referrals to brokers that your friends and family have used, or get a referral from a feedback site.

I am not sure if this would be of any use to you in your situation, but I often hear of "manual underwriting" as a way to get around the system if you have a strange circumstance like no credit score. I know that's not your situation but it may apply.

You will likely be a better candidate for a mortgage--from any source--if you are able to produce a larger down-payment. Just something to consider.
posted by FergieBelle at 10:13 AM on March 17, 2010

If those are the rules for a mortgage right now, it's flat-out not going to happen. A friend just went through the mortgage process, with amazing credit, almost 50% down, solid income, almost enough liquid cash to cover the remaining principal, and it was still a VERY drawn-out and frustrating process. There were some new rules enacted in January and these mortgage folks are so (understandably) shell-shocked that they're just not going to bend the rules. Even if you get one broker to try for you, it'll likely get denied at the lender's side of things, or somewhere else.
posted by barnone at 10:16 AM on March 17, 2010

The landlord is selling the house we're renting; both he and I would like my family to be the buyer.

This is not making sense- he's still collecting rent from you in the interim and in 11 months has a guaranteed buyer? What's the problem? Wait, and tell him to wait. It'd probably take 11 months to sell the house in the first place.
posted by ethnomethodologist at 11:15 AM on March 17, 2010

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posted by cortex (staff) at 11:53 AM on March 17, 2010

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