Even if you’re turned down for loan, you can still buy

John Adams

If you are renting and happy, then this column is not for you. But if you’ve tried to buy a home and been turned down by the bank, there still may be hope. And with historically low interest rates, now is a great time to look at alternative financing techniques.

Here are some questions I am often asked by would-be buyers:

Q: About a third of American households rent their home instead of owning. Yet most renters say they hope to one day become owners. What's stopping them?

A: For most of us, owning a home is the best investment we will ever make. It's still the primary means of wealth accumulation for most Americans over their lifetimes.

But it’s become much harder to buy a house. Income requirements are higher, down payment requirements have increased, and credit score requirements have been tightened since the Great Recession began in 2008. Now it’s tougher for anyone to get a loan.

Q: But you say folks can still buy a house, even if they've been turned down or can't qualify for a loan today?

A: Yes, the solution comes with thinking outside the box. You've just got to get beyond the idea of a conventional Fannie Mae or FHA loan, because the requirements are simply way too strict.

Q: So, what else is out there?

OK, in a nutshell, we have three alternatives for home buyers:

A. Loan assumptions:

Most home loans cannot be assumed unless the lender grants permission, but in the case of a short sale or a pre-foreclosure, a lender may consider allowing you to “take over” payments on an existing loan rather than applying for a new loan.

This is especially true if you plan to occupy the house as your principal residence. Contact a Realtor who specializes in short sales, and ask if they have any properties that might allow a loan assumption. They may say no, but if you are persistent, you might find the house you want.

In addition, while most home mortgage loans contain a “due on sale” clause preventing a loan from being assumed, that is not necessarily the case for loans between individuals. Your real estate professional and your attorney will make sure any existing loan can be assumed.

B. Owner financing:

Many owners of rental properties truly want to sell their real estate, but have given up for whatever reason, and decided to rent. If you can find a rental home in an area you want to live in, there is an odds-on chance that the owner might want to sell, and will sell to you with some form of owner financing. Remember, from the sellers perspective, selling to you on owner financing may be more desirable than renting, because the seller is relieved of all repair burdens.

In addition, the seller gets a guaranteed return on his investment. If you don’t pay, he can foreclose and take the house back. (Note to reader: Make sure this doesn’t happen.)

C. Lease with option to purchase plans:

Under a lease-option, you get to rent now, often for up to three years, and as long as you buy within a set period of time, a portion of the rent you pay may apply toward your purchase price.

In other words, for a specific period of time, you are granted an opportunity to purchase, but you have no obligation to do so unless you choose to do so.

This type of arrangement can be especially advantageous to renters, because it allows time for your income to grow and your credit to improve. In addition, depending on the terms of the agreement, you may be able to build enough “credit” from on-time rental payments to cover your down payment on a traditional mortgage.