How to Buy Real Estate with Bad Credit Scores
As a real estate broker, I get asked quite often how someone can purchase real estate if they have bad credit.
If this sounds like you and you’re worrying that your credit score will get turned down when qualifying for a mortgage, then keep reading as I’ve got some tips for you.
In short, you have 3 options:
- (1) Raise your credit score,
- (2) Buy with all cash, or
- (3) Find seller financing deals
Do Credit Scores Really Matter in Life?
People forget that credit is something you really don’t even need in life. The only purpose of a credit score is to qualify you with a bank to take on debt for a real estate loan. That’s it.
You shouldn’t be taking on debt for a car. You shouldn’t be racking up credit card debt either.
A lot of people shouldn’t even be taking on debt for a mortgage but they do. They try to rush the home purchase when financially they aren’t ready yet.
They end up taking on way to much debt that forces them to have to work many years of their life now to pay back the loan.
Ideally, you should rent for awhile and save up as much cash as you can. Then go out and buy a cheap starter home with this cash while continuing to save money away at a high rate.
Maybe it’s a fixer upper that you buy for $30,000 cash and end up selling a few years later for $90,000. Then take your $90,000 plus any extra cash you have saved and buy the mid level home at $110,000.
I hate seeing people go for that $300,000 home so early in life, putting $30,000 down and taking out a mortgage for $270,000.
Here’s what you should do instead..
Use your real estate loan for buying investment property, something that actually will make you a return on the loan. Otherwise, a house is just a liability that traps you into being a slave at your job to afford monthly payments.
Okay, so now that I’ve been super harsh and negative about buying a home on a mortgage. Let’s discuss the 3 solutions if you still haven’t clicked out of this article yet.
Option #1: Raise Your Credit
With this method, you’ll need to wait awhile longer to try and buy a home. It can take 12 to 24 months to raise credit and maybe longer.
Talk to a bank about special credit card programs that help build your credit.
It works like a debit card in that you have to give the bank money first before using this card and it’s capped at whatever amount you’re giving to the bank.
Then they use your prepaid money to pay off the credit card bill for you each month.
Credit scores can be raised using other methods and strategies.
Option #2: Pay All Cash
If you have bad credit, I’m going to recommend you buy a house with all cash.
Maybe some crazy unfortunate life even happened to you that wasn’t your fault and damaged your credit. Then I feel bad for you.
But realistically, if you have bad credit it’s because you weren’t being responsible in some form or fashion and odds are you probably won’t be responsible with mortgage debt either. This is why a bank will decline your loan when they see your bad credit score. You are high risk to them due to your past tendencies that created this mess in the first place.
To find a house you can afford to pay all cash, you’re going to need to learn how to research deals like an investor. Find homes you can buy cash for 30% of their true market value so you build some profits in them after fixing up.
Talk to a real estate agent or use Zillow to locate areas where you can find homes for under $50,000 if you don’t have much cash saved.
If you’ve got $100,000 cash in your bank account, then by all means go search for a higher priced home in a better neighborhood.
Starting out though, you’ll likely need to find mid-level neighborhoods with homes selling $80,000 to $125,000 and try to acquire one that comes on the market below $50,000.
It will be in rough shape and probably be a foreclosure home that someone else lost and the bank took over.
Live in the home while fixing it up to flip, then sell it and upgrade to the next house with your profits.
Option #3: Seller Financing
If you’re still determined to buy your dream home with debt, then option #3 is to find seller’s who will act as the bank and carry a loan for you.
We just sold our rental property to our tenants on seller financing. We profited about $75,000 from the flip and then will earn another $15,000 from the loan interest over 3 years until they pay us off with a bank loan.
To find homes that offer seller financing, you have to ask.
It will take a lot of work and you’ll need to screen through lots of deals but eventually you’ll find a seller who says yes when you pop the question of will they seller finance you.
Typically, you’ll get a higher yes rate if you tell them it’s short term.
For example, they can seller finance you for 3 years while you fix your credit score and then in 3 years you go to the bank to refinance and get a mortgage on the property.
Once the bank hands you the cash from the refinance, you use it to pay off the remaining balance you owe the seller that they were financing for you.
How Long Is a Seller Financing Loan?
Long term seller financing deals where the seller finances for 15 or 30 years are hard to find.
You can set up the amortization schedule the same as a 15 or 30 year loan, where you’re making payments to the seller as if it’s a 30 year mortgage.
The difference is that it has a balloon note you pay off after 3, 4, or 5 years. Once those 3 years expire, the note becomes due and you must pay off the balance or get the seller to extend it for awhile longer.
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How to Buy Your First Investment Property
If today’s blog post inspired you to get into real estate investing but you don’t know where to start, check out more articles from my blog that have lots of educational lessons and tips.
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- Why real estate is better than the stock market
- How to find deals with large profits
- How to fund your deals if you have little money
- How to analyze deals and know which one’s are worth offering on
- Setting up legal entities like an LLC
- The due diligence phase prior to closing on the property
- 4 ways you build wealth through real estate investing
- And much much much more!
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