How to overcome weird snags when I'm buying a house?
July 12, 2008 8:14 PM   Subscribe

Please help me with a weird house-buying situation caused by the mortgage crunch.

My wife and I are first-time house buyers. We finally found a house we love, and we want to buy it. Apart from some old medical bills, we're in a "not bad credit, just no credit" situation, because we have a good income, and we don't have any credit cards but buy everything with cash. When we applied for a mortgage, we were rejected because the mortgage industry won't lend money to anyone who doesn't have really good credit right now.

The house was advertised several months ago (that's how long it took us to get the mortgage application together and get turned down) as having a rent-to-buy option, so our next thought was to move in, clean up our credit, rent to own, and try again for a mortgage in a year or so.

The de facto owner of the house is an immigrant man who thought he could make a living flipping houses in the US. He bought the house with the help of a friend (whose name is on the existing mortgage) and has sunk several tens of thousands of dollars into the house. Then the mortgage crunch hit. Now he's getting cold feet but is at the same time obviously desperate and doesn't know what to do. As far as I can make out, he's paying the $2300 monthly house payments with his credit card and sinking deeper into debt every month.

Now instead of the $1500 rent-to-own payment cited in the ad for this property, he's asked us for $2000 a month and $10,000 down. (The property is worth about $250,000.) The $10,000 is meant to cover the payments he's missed or had to pay with credit card. The $2000 or more per month is meant to cover his mortgage payments -- or not quite. He says he's not sure a rent-to-own situation is even feasible for him anymore.

I told him we could cover the mortgage payments he's put on his credit card and we could completely cover the $2300 monthly payments from now on if he would sign his mortgage over to us. He said he would let us move in if we did that, but he wanted to keep his name on the mortgage. This is when he told me how much money he had already sunk into the house, and how much he stood to lose by just signing over the mortgage. I certainly can't blame him.

I pointed out that he would continue to lose money anyway if he didn't do something, because we're the only people to have shown any interest in the house in many months. (There's the mortgage crunch and also the fact that the house is unassuming, even ugly, on the outside, but beautiful on the inside, with special features such as a second detached building that would be especially useful to us in our professions -- but I'm trying to keep this anonymous, so I'll leave it there.)

So here we are on opposite sides of a chasm caused by the mortgagequake of 2008. We can see his position and he can see ours. We want to buy the house and he wants to unload it. But how?

Thoughts I've had: Our credit rating has improved a little in the past few weeks because we've been working on it while we're going back and forth with the owner. Should we apply again for a smaller loan, just enough to buy the owner out of his mortgage, paying off the house payments he missed and what he's sunk into the house? Or should we try to convince him that the money is truly sunk, and the best thing he can do is to get the hell out? After all, he's trashing his credit (or his friend's) if he defaults on the mortgage.

I'm really lost here and don't know what my options are. I will say that we have been working with a sympathetic mortgage broker and a real estate agent, ditto. The latter says she can't help much with rent to own, except that she can look over the rental contract to make sure it's sound. Still, they know us and we can marshal their help if necessary. My wife also stands to inherit (IIRC) some tens of thousands of dollars some months in the future (she must wait for a family property to be sold). Apart from that, we have some $15,000 in savings, some of which must be used for moving expenses. We also have good brains and the power of Ask Metafilter, so... Go Team Metafilter!

p.s. If your answer is "Ditch this clown and buy another house!", please don't. This is the only house we've seen that we've both loved, and it would break my wife's heart not to be able to buy it.
posted by anonymous to Work & Money (26 answers total) 1 user marked this as a favorite
Don't give him any money.

1. What money he put into the house is his problem. Not yours.

2. If you are buying the house, which you can't at this time, don't have his name on the mortgage.

3. Rent for a year, only paying the monthly rent.

What you want to do is sign a contract with this person for a seller finance. The terms will be a 12 month contract. Months 1 -12 you will pay 1500 dollars a month. At the end of 12 months reapply for financing. If you are qualified you make a balloon payment and pay off the seller loan. If you aren't qualified, you leave.

You don't give him 10 thousand dollars. I understand why the seller would ask for 10K. He's broke. Why not? This is not your problem and would be a mistake to give him this kind of money. You will have no leverage by giving him this money so why do it?

Bottom line: Don't give any money up front. Only give him what you are willing to pay monthly as rent and be able to walk away from if you don't get financing.
posted by LoriFLA at 8:46 PM on July 12, 2008 [2 favorites]

Why would you be willing to take on $2300 payments for a $250,000 house (unless that is the mortgage plus insurance plus taxes)? A 30 year mortgage at 8% (assuming not-great credit) is only a bit over $1800/month for the mortgage, according to an online calculator I just checked.

"Ditch this clown and buy another house!"

To be honest, that's my advice. There are a lot of houses for sale, and 99% of them don't have any weird complications preventing you from buying them.

But if you can't do that, then please have a lawyer work through the rent-to-buy paperwork for you to make sure that you are protected, the guy who says he is selling it can legally do so, the guy with his name on the mortgage says ok, and so on. This is over and above what your mortgage broker and real estate agent can handle -- you need to make sure you are protected if you go forward with this.

At some point in the process (possibly years down the road if you do a rent/buy deal), the house will probably need to get appraised -- be very careful that you are not paying more (because it is the "perfect" house) than the bank will agree that the house is worth. The price the property is being sold at is above its market price (because if it wasn't, the house would have sold already); don't agree to pay more than market price without an ironclad guarantee that the deal will go through with bank support when that is needed. This really matters if you are in an area where values have fallen and may continue to fall -- and this is part of why banks are being so careful at the moment.
posted by Forktine at 8:46 PM on July 12, 2008

Do you have a realtor helping you out? Go get one! They might actually be able to find you a mortgage company that will work with you!!!! And it won't cost you a cent!
posted by konolia at 8:50 PM on July 12, 2008

If you can afford it, you can get the loan - you just need to find a (sometimes larger) bank that will do manual / traditional underwriting. I can't find a good article online explaining it, but it's what they did before FICO Scores. As I understand it, your income is evaluated against any payments / debts you have, and they essentially determine if you can make the payments. Think of it as a credit score without the debt.
posted by niles at 8:59 PM on July 12, 2008

As a general rule of thumb with any real estate purchase: "Always be willing to walk away otherwise there is a good chance you'll get screwed". Make an honest assessment of how much you can pay. Make an honest assessment of the worth of the property. Attempt to deal for the lower of those two values and walk away if you can't come under that figure.

Assuming a flipper mortgage taken out pre crash and paying a bonus equivalent to the payments since is probably paying too much for the house. Remember by assuming the mortgage you're doing the favour for the seller not the other way around.

Who is paying your agent? If they "can't help you with the rent to own" you should get a new real estate agent who can help and advise you with this transaction 'cause honestly it sounds a bit like your agent wants to push you to a higher commission property. You can hire them on a hourly basis and they can give you a good assessment of the value of the house. In the unlikely case that assessment is less than the remaining mortgage + the requested deposit then great. If not, decide if you want to over pay for the property and (considering you are putting less than 5% down) probably starting out upside down on your house. I wouldn't but I'm risk adverse.

Instead I'd offer to assume the mortgage if it is less than the valuation. Remember because he's in the first few years of the mortgage he's essentially flushing a mortgage payment (plus insurance, taxes and upkeep) every month. And most places in the States and Canada haven't bottomed yet if you're in a post bubble market.

If the valuation is less than the outstanding mortgage then offer the valuation (IE: you assume the mortgage and he pays you a bonus). If he rejects keep an eye on the place, there is a good chance it'll be foreclosed and then you can proceed directly to the bank and make an offer, they may be more willing to lend you the money if you're buying their asset.

Make sure you use a lawyer to cover your butt for stuff like unpaid taxes or HOA fees as these are often in arrears in this situation.
posted by Mitheral at 9:05 PM on July 12, 2008 [1 favorite]

The guy isn't Casey Serin is he? One thing I learned about from reading his blog (before his entire life collapsed) is that you can do a 'wrap mortgage' where you just take over someone's payments. But you shouldn't get into any deals with this guy without going through a lawyer.

Seriously, for a $10k with a shady, desperate guy getting a lawyer to sign off on everything is really a no brainier.
posted by delmoi at 9:17 PM on July 12, 2008

This is the day of housing questions... I just asked one myself.

FWIW, I was at a seminar today and they said, of the rent-to-own situations specifically, that it's usually a supremely bad idea. You have next to no legal rights whatsoever if he decides he doesn't want to sell. In the eyes of the law you're just tenants.
posted by Kellydamnit at 9:20 PM on July 12, 2008 [1 favorite]

Seems to me the easiest thing to do would be bide your time, improve your credit rating, and wait for it to get foreclosed because the guy stopped making payments on it.
posted by ROU_Xenophobe at 10:10 PM on July 12, 2008

I'm inclined to agree with ROU_Xenophobe. This guy is in a financial crisis, you are the only people interested in the house, he's hemorrhaging money. Don't give him any cash.

The reality of the situation is that you have to be prepared to walk away. Getting your (or your wife's) heart set on this house is a bad idea, because it may lead you to make financial mistakes. You have to be heartless when it comes to this stuff, because it can screw your credit for years to come.

So, if you decide to go the rent-to-own way, get a lawyer and cover your ass. Or, just go find a house that has less financial drama associated with it.
posted by bedhead at 10:51 PM on July 12, 2008

A 30 year mortgage at 8% (assuming not-great credit) is only a bit over $1800/month for the mortgage, according to an online calculator I just checked.

I'm getting a 6.750 % fixed rate w/ 1.7% points for good/fair credit from eloan on a $250,000 purchase with 3% down.

Plugging in the numbers into my spiffy custom spreadsheet I'm seeing a carrying cost of $1500 per month on this. This factors in the mortgage interest deduction and other tax credits. (It assumes a 37% top marginal rate for this) plus insurance and maintenance. PITI itself is 2081.70.

Keep renting and buy maybe next year. Prices are only going to go down, down, down for the foreseeable future. Quite honestly there's no bottom in sight. 1997 prices are entirely possible (though I'm certainly not counting on that).

Don't be afraid of interest rate changes (upwards) since it makes sense to buy when rates are high (it tends to drives the price down) and refi when rates are low.

Don't fall in love with a place & deal you can't walk away from. That's the road to ruin for millions of americans today.
posted by yort at 11:00 PM on July 12, 2008

(note to the asker -- go to eloan, click Home Purchase > Search Rates . . .while I haven't yet pursued a loan with these guys I love their interface and quoting technology)
posted by yort at 11:03 PM on July 12, 2008

Getting your (or your wife's) heart set on this house is a bad idea, because it may lead you to make financial mistakes.

Don't fall in love with a place & deal you can't walk away from. That's the road to ruin for millions of americans today.

Just want to underscore these two comments. When so much money is on the line, you cannot let your heart (or your wife's heart) dictate the decision.
posted by scody at 12:22 AM on July 13, 2008 [3 favorites]

Mitheral has a good suggestion in general, offering to assume the mortgage, but most banks would require that the party assuming the mortgage is credit-worthy, and you are not, as you recognize.

A lawyer could help you devise a contract which provides that you would make his payments for, say, two years, and then buy the house at that time for a specified price at that time, conditioned on securing satisfactory financing. In the meantime, you could take the necessary steps to establish a credit history.
posted by megatherium at 3:47 AM on July 13, 2008

My gut instinct is, of course, "ditch the clown and find another house" but that's not what you want to hear, so here are two pieces of anecdote-based advice:

1. I just bought a home. We were negotiating and our final offer was X17,000. The owners of the house wanted X20,000. We said, well, sorry, that was our final offer. And then we walked. Our offer expired, a full 24 hours passed, we started looking at other houses, and then our real estate agent called me and said, "hey, they want to do X17, are you still up for it?" And of course we were -- that'd been our final offer. I really really loved this house and I am so happy we got it. But I am even happier that we didn't budge from our firm and final offer. In that case, we had a slight upper-hand because the house had been on the market for 14 days already (the Canadian market has not softened like the market in the US and in this particular area of Toronto, 14 days is a long time for a house to be on the market). In your case, you have so much more than the upper-hand -- you've got the only hand. Don't throw money at this guy. Don't take into account the money that he's put into the house -- that's not your responsibility. Tell him you're willing to rent for fair market value but don't you dare give him a 10k deposit. You'll never see that money again. Remember: you have upper hand. You're the only couple who has shown interest in this house. Don't be afraid to walk away -- I bet you'll hear from him within twelve hours.

2. I'm a recent immigrant to Canada and despite having a 35% downpayment for our house purchase, we had trouble getting a mortgage because I have almost no Canadian credit history. We went through three mortgage brokers, all of whom had either no mortgage or a crappy mortgage for us. Then we found a Mortgage Development Manager who gave us an excellent mortgage (prime -1 rather than prime -.5 as we'd been offered by others) and do you know what he used to compensate for my lack of credit history? RENT CHEQUES. He asked for copies of our rent payments for the last twelve months. His basis was, if I can pay my rent I can pay my mortgage. This is all to say that yes, you have no credit history. But keep looking for a mortgage -- I don't think it is an impossibility for you.
posted by kate blank at 4:19 AM on July 13, 2008 [2 favorites]

Are you 100% sure that his bank (or I suppose really, his friend's bank) will allow you to assume the mortgage? The paperwork I signed to get my mortgage specifically prohibits handing the mortgage over to someone else. Now, if I were facing a foreclosure my bank might decide that transferring the mortgage is a better deal for them than reclaiming the house, but the language of the paperwork suggest that this is an option they do not approve of.

I'm getting a 6.750 % fixed rate w/ 1.7% points for good/fair credit from eloan on a $250,000 purchase with 3% down.

Plugging in the numbers into my spiffy custom spreadsheet I'm seeing a carrying cost of $1500 per month on this. This factors in the mortgage interest deduction and other tax credits. (It assumes a 37% top marginal rate for this) plus insurance and maintenance. PITI itself is 2081.70.

Be careful about relying on deductions and tax credits -- I think people sometimes overestimate the impact of these, while forgetting that they already get the standard deduction and so on. And be realistic about maintenance and rehab costs, especially if the owner has not been able to put any money into the house for a while -- deferred maintenance can get really expensive. Check what your insurance rate will be -- some insurance agencies go partly by credit rating to assess risk, which may give you some problems.
posted by Forktine at 5:48 AM on July 13, 2008

You have to be able to walk away from anything you are negotiation to buy - cars, houses, furniture, contractor services, whatever. The cardinal rule is don't fall in love. It might be tough on your wife, but guess what will definitely be tougher? Being royally screwed over by these people, which is the vibe I am getting. There are too many people with a stake in this house and the fact that he's changing the terms of his "rent to own" terms and increasing the money is a huge red flag. This sounds like live action reinactment of a Nigerian email scam.

To be honest with you, this is WAY too complicated and too sketchy of a situation. Wait for your wife's inheritance to come through and start looking again. Also, FHA loans will loan to people with good credit, and up to 97% LTV, so look there. You're first time home buyers - this is absolutely NOT where you need to be. You need to back out now and RUN away.

Also, your mortgage broker and real estate agent can't do diddly for your legal interests. If for some insane reason you still go through with this, get a shark of a real estate lawyer involved like yesterday.
posted by jerseygirl at 6:46 AM on July 13, 2008 [1 favorite]

"I told him we could cover the mortgage payments he's put on his credit card and we could completely cover the $2300 monthly payments from now on if he would sign his mortgage over to us."

Seriously _do not do this_. Signing over the mortgage without a clear title gives you NO ownership at all, but makes you completely on the hook for the $$. The mortgage is the debt on the house, not the house itself.
posted by griffey at 7:22 AM on July 13, 2008

Forktine writes "Are you 100% sure that his bank (or I suppose really, his friend's bank) will allow you to assume the mortgage? The paperwork I signed to get my mortgage specifically prohibits handing the mortgage over to someone else."

Ah, I guess this varies. In Alberta all mortgages are assumable by law. Apparently due to some fuzziness in the law, and the current crashing market, some lenders may now require you to qualify though that hasn't been the case in the past.
posted by Mitheral at 8:06 AM on July 13, 2008

Nthing what everyone else has said: this is a bad idea. Like kellydammit, I took a class this spring for first time homebuyers and one of the things they harped on is that rent to own is almost always a disaster. If you're determined to do it, lawyer up. Don't give him one thin dime without an ironclad contract.
posted by mygothlaundry at 8:16 AM on July 13, 2008

What is the appraised value of the house? Appraisal will cost @ 300. Don't trust your own judgment, get it appraised. Also a very good negotiating tool. You are emotionally tied to this house, and need to apply facts.

Try more banks, esp. a credit union. If there is a local bank, an honest-to-goodness locally owned bank, not part of BankofCitiFargo, try them. They are able to use more common sense. What have you been paying for rent? Get documentation, and show a potential lender that you can pay that amount every month. They won't help you buy a house for more than it's worth, unless you have a huge down payment.

The owner's problems are unfortunate, but they are not your problems. You really need someone to sit down with you and do the numbers. Bankrate has good calculators for How much house can you afford, etc. Get pre-qualified for a mortgage, then make a low, realistic offer. At some point, the owner will recognize that their best option is to get out of the debt, even at a loss.

You have a 10,000 down payment, and want to buy a 250,000 house. No matter how much you want it, this might not be possible. It may be very well that the reason your loan application failed is that the bank doesn't think you can afford it.
posted by theora55 at 9:13 AM on July 13, 2008

You have a 10,000 down payment, and want to buy a 250,000 house. No matter how much you want it, this might not be possible.

Right. Trying to twist and turn the numbers to fit the situation is the mindset of the past 5 years or so: that a home can be bought some how, some way, under any circumstances. But that is precisely the mindset that drove millions of people -- including the current owner of the house you want -- right into a wall. The times in which people could buy a house with a 5% down payment are now over. And that's a good thing.

If you spend some time building good credit and waiting for your wife's inheritance, in a year or two you'll have enough money for good down payment and a better likelihood of qualifying for a conventional mortgage. Also, depending on where you live, prices may very well be even lower in a year; even if they're not lower, they're not going to balloon again like they could in the course of a year during the bubble, because the factors driving those escalating prices have collapsed.

It seems to me that you and your wife have been doing the smart financial thing by not taking on credit card debt, paying cash, etc. I think you guys should maintain that good track record by not buying a house till you can put 20% down and qualify for a regular mortgage. There will be other houses to love, and without the risky strings attached that this one evidently comes with.
posted by scody at 11:02 AM on July 13, 2008 do _not_ want the house this bad. Set terms that are clearly OK for you, and set the limits there. As a lot of folks have pointed out, you may very well get it in the end, on your terms. If not, though, at least you know you won't be looking at the ugly exterior _and_ a nasty credit situation, saying "What the f@%k were we thinking?"
posted by LairBob at 11:33 AM on July 13, 2008

First of all, you're not thinking about this house right. If you are spending the money to buy a house, interior amenities must not be factored into your decision. You can buy any house and have the interior reconfigured to your exact specifications for a tiny fraction of what it costs to buy the house and the land.

The only thing that matters about a residential property is where the land is located, because that is the only thing you can't change by pouring money into it. (Well, and maybe the zoning and local ordinances if you're planning on making major changes - but those also depend on the location.)

Second of all, if your credit isn't good enough to get a mortgage, it's not good enough to "take over" this guy's mortgage with your name on it - and he knows that. Think of it this way: is there any difference to the bank between a) loaning you $100,000 to pay off the current owner's mortgage, and b) the bank erases the current owners' name from the current mortgage and puts yours there? No. From the bank's perspective, these two transactions are exactly equivalent.

Third, this guy is seriously underwater on his house and can't make ends meet. That's not your problem. He needs to unload the house quick because his cash flow isn't covering the payments. That does *not* mean that the price of the house goes up for you because you have to cover the current owner's cash flow problems. It means that the price of the house goes *down* for you because the guy has to unload the house quick and you're his only hope. If you can afford to buy the house, you have him over a barrel.

Fourth, from what you're telling us, you can't afford to buy the house on terms that would be acceptable to this guy. That's what not being able to get that mortgage means: you can't afford the house. He's figured this out and is trying to make you into his tenant instead. Since your goal is to be a homeowner now, you should reject this offer out of hand.

Fifth, you are what brokers call "in love" with this house. That's a mistake, and it is a mistake that often causes innocent people like you to make bad decisions and lose hundreds of thousands of dollars. Sit down with your buyer's agent (you do have one, don't you?) and let him or her talk dispassionately to you about your options. Try to clear away your feelings about how it would be to live in that house long enough to hear what he or she has to say.
posted by ikkyu2 at 12:08 PM on July 13, 2008

I reread my answer above and maybe it's a bit confusing, so I will try again in a bit more detail. What I mean in #2 above is, suppose the owner owes $200,000 on his house. You want to get a loan for $200,000 to pay off his mortgage. But you've been turned down for that loan already.

This means that you can't have the owner "sign over" his loan to you. The bank won't let him do that. His lending bank made *him* sign an agreement to pay off the loan they gave him. They did that because of *his* good credit. They won't let you take over that loan, because it basically means replacing a loan to him for $200,000 with a loan to you for $200,000. You've already been turned down for this loan. You'll be turned down when you offer to assume the owner's loan to his lending bank, because it is the exact same transaction you've already been turned down for. He knows this.

Rent-to-own in the way that this guy has described it to you would be a foolish decision on your part. You will be assuming all the costs of ownership, including the down payment and a large monthly payment, but you will not receive the tax benefit of home ownership, which the owner will retain. (Actually he'll get a different kind of tax benefit for owning a depreciating rental property and running a rental business.) Forfeiting this tax benefit in your situation is absolutely unacceptable and you must not do it. You want to become a homeowner and accrue the benefits of home ownership. The tax benefit of home ownership is one that you cannot leave on the table in this transaction.

Also, the guy is probably sitting there thinking "These guys think they're going to own this place some day, so I will shunt off all the costs of maintenance onto them, by pleading the (very true) fact that I'm broke and can't afford to maintain the property." In other words you're being asked to rent a house with the full knowledge that the landlord isn't solvent enough to make needed repairs.

You are in a situation where your emotions are making you susceptible to being exploited. Proceed with caution.
posted by ikkyu2 at 12:21 PM on July 13, 2008 [2 favorites]

Let me deviate a bit from the bulk of the previous posters.

It isn't just about money, it's about house lust. You want what you want even if it isn't completely rational. You're willing to take risks to get it.

Here's a question: Would you be willing to rent this house for $2,300 a month? If so, well, you're going to be paying to put a roof over your head somewhere anyway, so you might as well go for it.

Go to a lawyer, and get a contract drafted where you take over the mortgage payments for two years, with an agreement to purchase the house at today's agreed price at that point. I wouldn't even be bothered by the $10,000 as long as it comes off the asking price. You would also take over the house maintenance as if you already owned it. No point in financially obligating your landlord to do something you know you cannot.

My only concern - and this is something your property lawyer can tell you about - is if the owner goes into foreclosure on other properties or bankruptcy or what have you, the house isn't owned by you and is still technically an asset, etc, so you need to address that in your agreement.

We just (as in yesterday) bought our first house. We did things that while not stupid, are non-traditional, in order to do so. We have no regrets. We did what we needed to do to make our hearts happy, and they are.
posted by DarlingBri at 5:23 PM on July 13, 2008

If it wasn't for your emotional attachment to the house, you'd be negotiating from a position of strength. If you're going to move forward, get a real estate lawyer.
posted by electroboy at 7:21 AM on July 14, 2008

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