Home Financing in a Foreclosure-heavy Market

In today's housing market, foreclosures are at a high that hasn't been seen since 1979. Seven percent, or roughly one of every 11 homes, is currently in foreclosure. According to the Mortgage Bankers' Association, 6.35 percent of homes are in delinquency but not yet in foreclosure.

The housing crisis is happening everywhere -- from Indiana to Texas and Maine to California. Though we most often hear about record foreclosures in California and Florida, a brief internet search will show you it truly is not limited to any particular region or state.

The housing market woes do not just affect potential home buyers. The mortgage brokers themselves are feeling the crunch. In Massachusetts, approximately 80 percent of the brokers who were in business at its peak (about two years ago) have now left or will leave the housing market by the end of June 2008. Those that are left have had to severely cut back and make changes in order to survive (letting go other personnel, working more hours, selling fewer homes).

Qualified buyers are typically seen as those who have credit scores of above 680 (FICO scores range from 350-800), with good, steady jobs and incomes. Today, many banks, feeling the burden of too many loans gone bad, do not want to give loans to anyone with a credit score below 720.

Also gone are the days of easy-to-get adjustable rate mortgages. Banks have learned that market will not always be in an upswing and not everyone can afford a home mortgage.

If you do end up in foreclosure, it will most likely be at least five years before you'll be considered for bank financing again. In addition, you'll need to have a credit score of at least 680 and at least a 10% deposit.

But what if you have a good deposit now and you need a home now, not five years down the line or whenever the housing market picks back up? Do you have any options? In short, yes.

There are actually lots of people who are willing to do owner financing. If you see a For Sale By Owner sign, it's a good idea to check it out and see what kind of a deal they would be willing to make you.

Creative home financing options can help you and your family get into a house sooner, and help the owner get out of their home sooner. After all, with banks so hesitant to give loans, FSBO homes aren't going to have a very good chance of selling, either. Creative financing can help owners and buyers find mutual satisfaction.

In addition to looking for FSBO homes, there are other things potential home buyers can do to increase their chances of getting a home. To start, save up and get as much cash together as you can for a down payment.

When home owners are faced with letting their homes sit on the market for years (because no bank will give a buyer a loan) or taking a nice chunk of money up front and then a steady income from monthly payments for a number of years, they're going to be tempted.

Having that nice down payment also can help the current home owners get into their next house - a point that should be made to them in case they haven't thought of it. There are also experts available who know the ins and outs and strategies of creative home financing.

Another version of creative home financing is a land contract. This is along the lines of what we've already talked about, but with some sellers, they may be willing to accept a much lower down payment, spread your payments out over 40 years instead of the typical 30, and negotiate with you on the interest loan.

Check with your friends and family. Sure, there are reasons to be cautious when lending and borrowing money with relatives and friends. But if you know people who could probably spare the money for a down payment, and you can offer them a higher interest rate than they're getting by having their money sit at the bank, it could be a very attractive option for both of you.

Do you have other property? If you have other property already, you may be able to get a loan from that property to put towards a down payment on new property. It's worth thinking about.

The next idea is one you should think very cautiously about, but it is an option. Particularly if you are dealing with a FSBO situation, perhaps you could put part of your down payment on your credit card. This should really only be contemplated if you're going to be able to pay that amount off on your card very quickly (say, if you're expecting your tax refund or stimulus check) because credit card interest rates, as well all know, are ridiculously high.

As is true any time you are looking to take on debt, you need to be cautious. The banks have learned their lesson, so they're not going to be as easy to finance a home with for some time.

You, too, as the potential home buyer, need to be careful. Think through just how much debt you can take on. But do not let the current market discourage you from moving forward with home ownership plans. You may have to look a little harder, search a little longer, and maybe keep your dream house away for another few years. However, with the right spirit, intentions, planning, and creativity, you will find a home financing option that works for you and the seller.


Copyright: 2008 Cory Shrader