Financing in Racine>Question Details

Sarah, Other/Just Looking in Racine, WI

Is it a bad idea to purchase a home with a high intrest rate if the intention is to refinance in a year or two? I recently noticed a home for sale in

Asked by Sarah, Racine, WI Thu Jan 7, 2010

the area I have always wanted to live, but could not afford. It is listed at $50,000 less than its assessed value becuase it is a short sale and needs some work (mostly cosmetic and I have multipal friends and family members who would be able to handle this for me). The problem is I was discharged from a bankruptcy in Sept 08 and my credit score is only about 510. Is it even possible to get a loan with that low of a score? If not, would a cosigner or large downpayment help? If so, how large would it have to be? If I were able to get a loan, would it ba a bad idea to buy and then refinance in a year or two when my credit is better? I know idealy a person should get their score up first, but I have been watching this neighborhood for about 5 years and this is by far the best deal I have seen. Thank you for your answer.

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It's not a bad idea. It's a terrible idea. Don't do it. Let's address your questions and issues:

SARAH: It is listed at $50,000 less than its assessed value.
ANSWER: That's totally irrelevant and meaningless. That tells you nothing about the value of the home. Have a Realtor do a CMA on the property. That's free, and you'll have a much better idea of whether the listed price is high or low. Never, ever rely on a property's assessment to determine value.

SARAH: I was discharged from a bankruptcy in Sept 08 and my credit score is only about 510. Is it even possible to get a loan with that low of a score?
ANSWER: I defer to Ron and his answer--No. That was my reaction initially, though, too.

SARAH: If not, would a cosigner or large downpayment help?
ANSWER: Yes. But the question is whether it would help enough. At this point, probably not.

SARAH: If I were able to get a loan, would it ba a bad idea to buy and then refinance in a year or two when my credit is better?
ANSWER: It would be a very bad idea. At the top of the real estate bubble, people were using that sort of financing, with the expectation they'd be able to refinance. They'd get 100% loans--an 80% at a decent (though not great rate) and an astronomical 20% second. Then they found they weren't able to refinance, and many, many of them went into foreclosure. And even if your credit improved substantially (with your history, assume 2-3 years, at least), the refinancing would also depend on the equity in your home. Suppose you paid $300,000 (fair market value) with 20% down, so you'd have a mortgage of $240,000. Assume the property value declines by 10% Now the home is only worth $270,000. Even with great credit, you might not be able to refinance.

SARAH: Another reason I want to buy now is to take advantage of the $8,000 tax credit.
ANSWER: Forget the credit. It's nice, but it shouldn't be your prime motivation. Besides, there's a school of thought (I don't fully agree with, but there's some logic there) that once the tax credit disappears, prices will drop. Because of the tax credit, people are willing to pay $x for a property. Without the credit, that same property would essentially cost $8,000 more. So the same buyers either won't buy, or they'll want to pay $8,000 less. In other words, the tax credit is an artificial prop keeping prices higher than they'd be without the credit.

So, what should you do? Two possibilities:

(1) Rent and work on repairing your credit. With a lot of effort on your part, you may be ready to buy in about 2-3 years.

(2) Have a friend or relative purchase the property. You wouldn't be involved in that transaction at all. Then do a lease-option with the new owner, giving you the right to purchase the property any time in the next 3 years for a set figure.

Hope that helps.
1 vote Thank Flag Link Thu Jan 7, 2010
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
Contact
Hi Sarah-

The most direct answer is you cannot get financing with the 1 year old BK and current FICO score unless you enter the realm of hard money lending, IF it is available for a first time homebuyer.

That being said, you are also asking for trouble if you consider buying your first home with intentions of long term flipping/refinancing. If you did use a government entity's DPA (Down Payment Assistance) program IF it was available with your current credit situration it would not be something you could easily finance out of.

Your best bet is to contact your local "big city government" to see what credit counseling agencies can help you restore your credit. Do NOT pay ANYONE to help you restore your credit. It would be just as easy to open your living room window and throw that cash out!

A local government sponsored credit counseling agency will allow you to build your credit correctly. Trust me when I tell you we are "rounding second base" on all the foreclosure/short sale activity. You'll have plenty of time to find a great deal on the house you will want to call your own.

Best Wishes!

http://www.ronbeebe.com
1 vote Thank Flag Link Thu Jan 7, 2010
Don was right.

A lot of people got the kind of loan you mention.

The foreclosures we have all over today are a direct result of that type of loan.

The future is unknown. (expect maybe to me <winks>) If you think you know you can get a new loan later, you are wrong. You are hoping you can. WHAT IF you can't?

you would add one foreclosure to your record. not a good thing.

Do not risk hurting yourself more than you already have. Avoid this situation until you can really afford it. Not now.
0 votes Thank Flag Link Thu Jan 7, 2010
510? Fugeddaboudit, Sarah, what are you thinking? (bold, screaming caps) 510? (off).

Sarah, 510, you should be on the sidelines, as if you were a soccer player with a torn ACL. Rehab that credit, like you would that leg, before you get back on the field. No matter how good the deal is, no matter how much you're aching to get back in the game.

Real estate should be played by financially healthy people. It's not a sin to have your credit injured, but it's probably a sin to continue to play while it's injured.

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It is a bad idea to speculate that you'll be able to refinance in a year or two. The lending standards seem to change on a monthly basis, and you may find that when refinancing time comes around, the refinancing window will have been shut down.
0 votes Thank Flag Link Thu Jan 7, 2010
Sarah

I think Don has summed things up pretty darn well. The wise approach in any large financial obligation is to enter knowing you can afford it and can cover any unfortunate/unexpected circumstances that may arise long enough to set things right...

Like loss of job, plumbing begins to leak, asteroid destroys roof, whatever...

The last thing you want to do is rush things and end up with a Foreclosure or another Bankruptcy, then getting that home where you always wanted to live will most likely remain a "always wanted to"

Prices are not going to take a Dramatic upswing anytime soon IMO so perhaps your best plan is as suggested..keep watching, stay/get as informed as possible about your market, work on the credit.

No matter what the Price it is not a good deal if you are having to hope to refinance to make it work before you even make an offer.

Just my opinion
Dunes
4points
0 votes Thank Flag Link Thu Jan 7, 2010
Sarah: If the Bk is a chapter 13, you can buy one day out of discharge date. If it's chapter 7, it will be 2 years from filing date (1 year under special circumstances). There are lenders out there (First Guarantee) that will lend with 530 scores, but it's better to get your scores to at least 580 for a more competitive rate. The 580 score rates are only about a quarter to half percent higher than everyone else, so no need to refinance later. Getting a co-signer only helps you with income, not with credit qualifying (opposite of buying a car). A larger downpayment isn't really necessary for FHA (minimum down 3.5%), however, it wouldn't hurt to put 5% down. You'll want to make sure you have a good amount of money left over after the closing. Although FHA doesn't require savings after closing, it looks better. You'll probably need to add some credit to your file to boost your scores. Look for secured credit cards, either from credit unions or visit Clark Howard's website for information on companies to avoid or use for secured debt. Make sure the secured company reports to the bureaus. You'll also have to make sure that you don't have any late payments on anything after a BK, EVER.
0 votes Thank Flag Link Thu Jan 7, 2010
Meet with a financial adviser from your local bank, but I certainly wouldn't buy anything you can only afford short term on the chance that you can change the terms by refinancing later. Refinancing is getting more and more difficult, and there is absolutely no guarantee you'd be able to when things get tougher. If anything, it's more difficult to refinance when you're facing a financial crisis, bit of a catch-22 but that's why so many sellers are in trouble now.

Try to find out what you can afford NOW, and lock the best rate you can long term. If it doesn't look sustainable, it's probably better to wait until you're in a better position. Good luck!
0 votes Thank Flag Link Thu Jan 7, 2010
Hi Sarah,

As Ron Beebe pointed out, there is no reason to pay for financial counselling! However, there are agents and lenders in this business who will truly put your best interest first. We are here to help and to point you in the right direction to get you where you want to be at no cost to you.

Ron also makes a good point when he states that we are "rounding second base on foreclosure and shortsales". I agree. However, nobody knows for sure what the future holds in this market. The sooner you get moving on repairing your credit, the sooner you get into a home of your own.

I am currently working with a client that was turned down by a handful of lenders. She finally found someone who was willing to spend the time needed to explain what she needed to do and she did it. She did not have a BK on her record, but she was told by other lenders it would take her at least a year-and-a half to qualify. It has only been 5 mths and we are in the middle of an offer right now.

I also have a client that filed BK a little over a year ago and we are currently working on a counter offer.

I cannot make any promises to you, nor is this going to be an easy road. However, if you want it bad enough, we can work together to get you there.

Don't give up, just get going. You have taken the first step by asking the right questions. Now you need to pursue the answers.

Linda
0 votes Thank Flag Link Thu Jan 7, 2010
Sarah,

I'm finding that it is becoming increasingly difficult to obtain financing - even conventional financing - for homes that need work. I would need to know a bit more detail about the home. You should be okay on the BK, however the credit score is tough. I work with several lenders who may be able to help you and I live in the Racine area and work in Milwaukee and surrounding suburbs. I would love to answer all of your questions and point you in the right direction to help you get that home. In answer to your question about the interest rates, let me just say this. I have worked with people who started out in your position and I helped them quickly regain credit points in a matter of months. Again, I would need more particulars.

Finally, don't be fooled by the low interest rates. They are not going to stay where they are. If we hadn't experienced the total economic upset that we've had, the interest rates would have been on the rise a year ago. If you do obtain financing with a somewhat higher interest rate, you absolutely must keep excellent credit in order to refinance and you must make sure that the provider of the loan allows you to refi at any time. Do not get a variable interest loan!

Linda
0 votes Thank Flag Link Thu Jan 7, 2010
Oh, and a little more info on my situation...I filed a Chapter 7 bankruptcy and have never owned a home before. Another reason I want to buy now is to take advantage of the $8,000 tax credit. I may also be eligible for our state's downpayment assistance.
0 votes Thank Flag Link Thu Jan 7, 2010
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