How do I buy a house with bad credit?
April 6, 2007 7:15 AM   Subscribe

I want to buy a house. I have 20 grand but bad credit and a long term boyfriend with no money and good credit. What is the best option?

I want to buy a house next year but my FICA/ credit score is really low due to a delinquent credit card debt that I was carrying after college. At one point I was over 20,000 in the hole. I thought I was doing the right thing by closing out all of my credit cards and living only by debit card. I have come to learn that not having a credit card can bring down a credit score. I do get those "pre-approved" offers in the mail, but I stopped applying for them when I kept getting declined.

Today, I am debt free and have moved beyond the paycheck to paycheck period and have even been able to save about 20 grand (now in CD's and high interest savings account) I live with my boyfriend for 4 years. He has a great credit rating, but does not have any money to add to the deposit on the house. (He's a full time student) It is tempting to use my money and his credit score to buy the house, but without us being married I feel a little vulnerable with that option. (Are there downfalls to owning a house and not being married?) I really want to be able to do it on my own without being screwed by high interest rates. Anyone have any suggestions?
posted by brinkzilla to Work & Money (25 answers total) 12 users marked this as a favorite
Is marriage not an option?
posted by hermitosis at 7:26 AM on April 6, 2007

It seems like the problem with trying to use his credit score in is not so much that he can't contribute to the deposit as that he also doesn't have any income. The credit score is a measure of the likelihood he'll pay the money back--and while he might have a very good record of paying money back, banks still won't approve him for a mortgage if he's got no income.

How long is it until those delinquent credit cards start falling off your credit report?
posted by jacquilynne at 7:33 AM on April 6, 2007

Talk to your bank, or whoever it is you'd be getting the mortgage from, and see if you can work something out.
posted by The corpse in the library at 7:36 AM on April 6, 2007

banks still won't approve him for a mortgage if he's got no income.

This is not true. I've gotten a mortgage with no income, and a friend has gotten several.

I would suggest getting a credit card (assuming you're able to by now) and waiting till you have credit of your own to buy a house. I heartily agree that you should "feel a little vulnerable" about using your boyfriend's, and I personally think getting married for the sake of house purchase is a terrible idea.
posted by languagehat at 7:42 AM on April 6, 2007

When we bought our house, my husband and I were surprised that it was easier to get a mortgage than a credit card or car loan. Seriously. We worked with a wonderful broker at NextHome. She did the shopping around for us, and we ended up with a 5.25% interest rate even though, at the time, our credit scores were both in the low 600's.

Good luck!
posted by ferociouskitty at 7:45 AM on April 6, 2007 [2 favorites]

Transfer your money to your boyfriend. Have him buy the house, but have your name on the contract as co-owner. He will have to assume all the financial risk. You will have to trust him. Draw up a contract stating what will happen if you two break up. The downside of this is that making the payments is another way for you to build the credit you don't have.
posted by xammerboy at 7:49 AM on April 6, 2007

Forgot to mention - we first tried our own banks and thought everything was hopeless - they wanted us to have 6 months expenses in savings BEYOND our down payment (which I agree is smart), but it just wasn't going to happen with our situation at the time. So even if YOUR bank says no, you may still want to pursue other options.
posted by ferociouskitty at 7:49 AM on April 6, 2007

Best answer: You can build your credit by taking out a secured loan against your savings (not all your savings, just $1000 or so) and pay it back on time. Loans secured by savings usually have lower interest rates than other types of personal loans. Additionally, you can get a credit card through orchard bank, they have fees and high interest, but they approved a friend with bad credit so I'm guessing they'd approve someone with no recent credit. Finally, you can get a secured credit card. You will accrue interest on your savings. My sister got her first credit card this way.

Speaking of my sister, she had savings and wanted to buy a house but also had really bad credit. She spoke to a mortgage lender who gave her tips. She went to a class, some sort of how to be a better borrower type of class, and that lowered her interest rate. She got some other tips as well. In a month, she went from not having good enough credit to open a checking account to getting a mortgage. After 6 months, she was able to refinance at a lower rate. A few years later, she had perfect credit and qualified for the lowest rates available. So, speak to a mortgage lender and see what they advise.

Also, if you belong to a credit union, you'll get better rates, or so they say. If you don't have access to a credit union through work, there are other ways to get access to credit unions. If you are interested drop me a line (email in profile). I just helped my mom find a credit union so I have a bunch of links to credit unions that grant membership to members of particular organizations or residents or particular areas.
posted by necessitas at 7:51 AM on April 6, 2007 [3 favorites]

Oh, I forgot to mention: do not transfer your money to your bf and have him buy the house . This is a very bad idea. The best and easiest way to rebuild your credit is to get a mortgage and make payments on time, etc. Even if you have higher interest till you are able to refinance in 6 months or a year, it will be worth it to have good credit for the future.
posted by necessitas at 7:55 AM on April 6, 2007

Response by poster: Let me widdle the question down to this (without the boyfriend/ marriage benefit equation- Maybe this should be a whole seperate topic)

How can I repair/ improve my credit score to buy a house within a year or so. It's only been in the past year that I paid off my last delinquent debts, so the bad debts won't fall off for another 6 years. I'm afraid that applying blindly for credit cards will also negitively impact my score, so tips on what credit card companies give cards to poor saps like me.

Goal- improve credit score, buy a house, not get screwed if score is bad. What should I focus on, what should I look out for?
posted by brinkzilla at 8:10 AM on April 6, 2007

If you were to go the route of transferring $20K to your bf, he'd be obligated to pay gift tax on it. (Anything over 12k). And the mortgage guy will need to see the paper trail of how he got that 20K.

However, if you have good credit, mortgage companies will bend over backwards to give you a great deal with no down payment. He doesn't need your 20K to get the mortgage.

I don't actually advocate him buying the house for the two of you but leaving you out of the paperwork. There are no significant downfalls to not being married. regarding owning a home. Not co-owning the home is a different story.

/brand-new homeowner
posted by desuetude at 8:20 AM on April 6, 2007

call a mortgage guy.
posted by thilmony at 8:20 AM on April 6, 2007

Best answer: When I started building credit, I got a secured Visa through my bank, which I paid off in full every month, and a couple of store credit cards for stores that I normally shopped in. My secured credit card automatically became a normal credit card in six months. I bought something small on those cards every month and paid them off in full as well.

I don't know if this is true (I'm sure someone reading this will know), but I always heard that applying for multiple cards on the same day will only ding your credit report once, instead of once for each card. If that's true, and you decide to try to get some store credit cards, you should obviously apply for them all in one day.
posted by amarynth at 8:21 AM on April 6, 2007

Bought something small on those store cards, I should say.
posted by amarynth at 8:22 AM on April 6, 2007

Two people can buy a house together without being married -- it happens all the time. Just call a mortgage broker and tell them you want to see what you can pre-qualify for. They can pretty much do that over the phone these days. They'll tell you what you qualify for, and if it isn't enough, then you'll at least know where to go from here in terms of building up your credit rating or whatever. You should apply anyway before you do any shopping, so you know what you can afford.
posted by spilon at 8:24 AM on April 6, 2007 [1 favorite]

Oh, and I think cell phone companies also report to credit bureaus, so if you don't have a cell phone, getting one may help.
posted by amarynth at 8:25 AM on April 6, 2007

I really think the best recommendation is to, as thilmony said, call a mortgage broker. Ask around friends/family to find someone that is good and just lay it all out for the broker. We just went through this look-and-see mission with a broker and he gave us the full breakdown. He also helped us by pointing out two dings on our credit and how to fix them. Luckily for us, the dings were fairly easy to take care of. He also gave us a breakdown of what we would be eligible for with our current score and what we might be eligible for after we attend to those credit issues.

I think you can buy a house with another person whether they are friend, family or a committed partner but you obviously are already thinking through the pitfalls of that issue. Since you are a bit worried there, I would have the broker address your credit score and issues one-on-one. Once you have a good idea of what that really is, you can bring up the possibility of having a co-signer who has a better score and see what the broker says.

Pick up a book, even a "For Dummies" guide on buying a house and you'll feel a lot better about discussing the options. I'm sure you could find a real cheap, used one at Powell's.
posted by amanda at 8:39 AM on April 6, 2007 for repairing credit. Many people have success in obtaining decent credit scores within months. Give their advice a try. It's working so far for me, we're in a similar boat, only my husband has somewhat bad credit and I have none. We're getting there!
posted by othersomethings at 8:40 AM on April 6, 2007 [1 favorite]

You can definitely buy a house without being married. In fact, marrying someone with bad credit may affect your credit as well, which is worth thinking about it. Who holds the mortgage and how much income that person has also affects the tax deductions you can take on interest and property taxes, so that is worth considering as well. You should definitely either talk to a professional and/or do some serious research about this. I find that some gay and lesbian support websites are more likely to have information on how unmarried partners can buy property and what they should consider. Check out Suze Orman's site too - she's big on the impact of credit ratings on marriage and partnership.
posted by walla at 9:09 AM on April 6, 2007

I was very pleasantly surprised to find a mortgage assistance program in New York State that has wonderful terms for first time home-buyers. New Jersey seems to have something similar. They are designed for people who will be residents, not investors, and they care more about your work history than your credit and available cash.

I agree with those above who say that you should plow ahead by talking to your bank or a mortgage broker to see what you will be pre-approved for. The process is very easy. Just make sure you are happy with the terms and have a very clear idea of how much you can afford to spend before you get starry-eyed over the real estate listings.
posted by saffry at 10:17 AM on April 6, 2007

If you were to go the route of transferring $20K to your bf, he'd be obligated to pay gift tax on it. (Anything over 12k). And the mortgage guy will need to see the paper trail of how he got that 20K.

This is a common misconception. There is no such thing as a "gift tax" for recipients of gifts.

The person who gives a gift rarely has to pay gift tax either.

If you gave your boyfriend over $12,000 in one year, the excess amount ($8,000 in this case) would count against your lifetime exemption from gift tax (currently $1,000,000).

In other words, to owe any gift tax, over the course of your entire life, you would still need to give away another $992,000 on top of the $12,000/year you're allowed per recipient.

posted by designbot at 10:21 AM on April 6, 2007 [3 favorites]

I have had bankruptcy, bad credit for 20 years, and still got a mortgage, car loan, and still get credit card offers all the time. You don't have to have good credit to get a mortgage.

However, I personally would not advise anyone to take out a mortgage. Get the repossessed home list for your area, you can buy a house lock, stock and barrell for $20,000 in CASH and then never have a mortgage. You might have to fix the house up a little, but that's something you can do a little at a time as you get the money, and in the meantime, you have a house with NO MORTGAGE PAYMENT, and believe me, that's something you want.

You also don't have to get married, you can both be on the deed to the house, and if you ever split up, then you have to sell it and split the profit. But if you buy a fixer upper and renovate it, you'll end up making a lot more when you sell it than what you paid.
posted by unhindered at 11:44 AM on April 6, 2007

Best answer: Debtor Boards has forums that will help you in gaming your FICO to best advantage.

In a nutshell you're looking at trying to have a combination of available credit and total debt, payment history, and length of credit history that maximize your FICO score.

Having a history of on-time payment is self explanatory. Order your reports for all three bureaus and look at what's listed. If you have any 30/60/90 days overdue on there make sure they're within the last 7 years (the bureaus are not always good about expiring things when they should) and if so, see what you can do to contest them. Debtor Boards will have advice, but never overlook the simple power of just asking if you have a relationship with the lender (though it sounds like you severed all ties).

Available credit and total debt are a bit of a mystery (FICO scoring is a trade secret) but the 'sweet spot' seems to be somewhere between 10 and 30% utilization, so if you have 10,000 in total credit limit you'd want to be carrying 1,000 to 3,000 in balance. Debtor Boards will elaborate.

Length of credit history is the only other thing and there's not much you can do about it. HOWEVER, be careful as you go through your report and try to avoid accidentally killing an old account that contributes to your oldest credit history. I've read many a cautionary tale about a person who successfully contested a 5-7 year old tradeline that had some late payments on it from far back, only to find that having the line removed completely did their score more harm than good.

Are these old debts of yours more than 7 years in the past? Are they all satisfied? If not you might run into issues beyond FICO - I've also read of people with old charge-offs who were told by a lender that they had to satisfy outstanding debts before they could get the loan even though their score was acceptable.
posted by phearlez at 11:48 AM on April 6, 2007 [2 favorites]

Best answer: I own a house with my partner, we are not married. When we bought our first house, we both had very little credit history but still made it work, now we both have good credit and can get great rates. We went from no credit history at all (worse than having bad credit) to having good enough credit to buy that condo in the space of 18 months, so you can definitely do it.

Since you already have a credit score, I second the advice to go to a Mortgage Broker and discuss the options. Don't go to a bunch of different brokers, or apply for a bunch of different online mortgage quotes, as all those checks are a slight ding on your credit (stupid rule). As someone else suggested, get a credit card, even a secured one, use it and pay it off every month, perhaps on something predictable like gas, rather than using it for everything and running up a larger bill. The Mortgage Broker should have some good suggestions about how to fix your credit though. Oh, another tip we got was to make sure all our household bills (gas, elec etc) were in both our names, that way we both have credit history from those.
posted by Joh at 12:32 PM on April 6, 2007

If you turn out to be a 'bad risk', predatory mortgage lenders prey on you. Subprime, interest only, etc. Whetever your do, SIGN NOTHING until you've read the doccument, cover to cover. Assurances from lenders mean nothing: it's the doccumnet that counts.

Better yet, take the document away with you and pay someone independent to do so. If the lender refuses, walk away and contact your BBB. People have been suckered into all kinds of crap.
posted by lalochezia at 9:24 AM on April 7, 2007

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