As you probably already know, it can be almost impossible to obtain a bank mortgage with bad credit. If you otherwise can't get a loan because you have a troubled credit history, one alternative to a traditional bank mortgage is to obtain one from the seller. Seller financing has its benefits, as well as its risks. You also need to know how to find the right seller to meet your needs.
These days, real estate prices have dropped yet property owners are still having a hard time selling homes. That means more owners are desperate to sell. As a result, more sellers may entertain using this unconventional approach.
Interest rates are also low. This can make seller financing more attractive to property owners, especially those who aren't reinvesting in more real estate but are looking for income-producing investments. Banks offer investors less than 2% interest. If you come along and offer 4%, that could be engaging for the right seller.
First, if you have some financial challenges in your history and need to build your credit score, conventional lenders may not be willing to give you a loan. If that's the case, this may be the only alternative you have to take advantage of the current low real estate prices.
Second, when you get a loan directly from your seller, you save all kinds of fees. These purchases are typically made directly. That means you save on real estate commissions on top of all the loan fees and points you keep. Compared to a conventional purchase, you could be saving tens of thousands of dollars when you consider all the commissions, points and fees.
On top of that, you could possibly arrange a much lower interest rate. For example, if you have impaired credit, you might get a loan from a bank but it might be very expensive. On the other hand, a seller might be persuaded to view your credit history differently and extend a lower rate as a result.
How to Find the Right Seller
To be sure, most people who sell real estate are not in a position to back your loan. And even those who are may need to be persuaded. But you only need to find one seller who is willing.
You are looking for people who are downsizing and those with a ton of equity or better yet, no mortgage at all. Get the word out to friends and family. Spread a wide net. Use your social circles and social media such as Twitter and Facebook to get the word out. Search ads in Craigslist and actually place an ad there and in your local paper. Don't give up and don't stop there. Let people in your church, synagogue, or other communities know what you are looking for and ask them to keep their eyes open.
You can even approach real estate agents and brokers. Let them know what you are interested in doing. Speak to many brokers and follow up with them. Ask friends if they know good real estate professionals who either specialize in this or who are seasoned veterans. Realtors who have been active for many years have the greatest chance of knowing clients who might be the perfect match for you.
How to Convince a Seller to Do Business With You
As I said, most sellers will be hesitant to carry your loan. That's because they don't want to have to foreclose should you be unable to make your payments. And they think you are a greater risk since they know banks won't grant you a loan.
Your job is to help them overcome their fears. You do this by coming into the deal with a very large down payment. Also, prepare a "resume" of sorts that shows them how stable your income is. Be upfront about credit blemishes and explain what you've done to correct your mistakes.
As a last resort, get another person to co-sign the loan. This is certainly far from ideal and it may be difficult. But like finding a seller to finance, remember, you only need to find one person to co-sign in order to make this happen.
Buying a home using seller financing is not without risk. If a bank feels it's better off not making a loan to you, they might know something you don't. If you take on a debt that you can't afford, you'll end up losing the property, your down payment and your good credit score.
Buying a house and having the seller carry your mortgage can be a great way to take advantage of today's low real estate prices and interest rates. It's not easy to pull off but it's well worth it if you have no alternative. And, while difficult, it's far from impossible if you follow the steps outlined above.
"With all the Fortune 500 companies located here there are quite a lot of high-salaried individuals," said Shaun Bond, a professor of finance and real estate at the University of Cincinnati. "And the Midwest housing market has always been more affordable; there are fewer constraints on growth."
With median income at more than $71,000 a year, workers earn about 10 percent more than the national median. Meanwhile, median home prices have never exceeded $148,000, according to the NAHB.
"We don't have the kind of volatility in income or home prices that cities with more concentrated industries have," said Bond.
In the 20th century, Akron's economy grew in lockstep with the auto industry.
"It was the big rubber capital," said University of Cincinnati professor of finance and real estate Shaun Bond. Tens of thousands of local area residents went to work each day in the plants of Firestone, Goodyear, Goodrich and other tire manufacturers.
With factory jobs harder to come by, the Akron metro area has become a slow growth zone. The population has only increased by less than 7 percent since 1990, a period when the U.S. population soared by about 26 percent. Even favorite son LeBron James split town for fancy Miami.
And home prices are depressed, down 22 percent from their 2007 peak, according to NAHB. With family income just above the national median and such beaten down prices, most families can easily afford to buy a place.
Syracuse University, with its 20,000 students and 1,500 faculty members, helps keep the area's economy humming. Teachers, nurses and bank clerks far outnumber factory workers these days, according to the non-profit Syracuse Economic Development Corporation.
That has helped push the area's median income to a level that is slightly higher than the national average.
All of those jobs are not doing much to attract new residents, however. In fact, the metro area has seen less than a 2 percent increase in population since 2000, compared with nearly 10 percent nationally. As a result, there's very little competition for housing.
Those factors combined make buying a home in Syracuse very affordable. The current median home price of $106,000 is only 60 percent higher than the annual median income of a typical family.
Ogden's population has been rapidly expanding, thanks to the large families of Mormons that reside here, according to Jaren Pope, an economics professor at Brigham Young University.
Pro-business policies have attracted many private employers, such as FJ Management, an oil services company, Convergys, a business consultancy, and Autoliv, an automotive safety systems company, all of which are based in Ogden. And there's also the IRS, which runs a big facility with 5,000 workers.
A high growth rate, in both the population and the economy, isn't usually a recipe for affordable home prices. Indeed, home prices in Ogden slightly exceed the national median.
However, Utah's pro-business policies also extend to real estate developers. And, as a result, home building can be done much more economically.
The biggest problem in Ogden is finding land to build on since the town runs up against the Wasatch Mountains, said Pope.
Still, with the median home price at $166,000 and incomes high here, Ogden is one of the most affordable of all western markets.
A world away from the Big Apple -- one of the most expensive housing markets in the nation -- Buffalo is the most affordable major metro area to buy a home in the state of New York.
Part of the reason is that demand for housing is very low. The area's population has shrunk by about 5 percent since 1990 as its Rust-Belt manufacturers either closed shop or laid off workers.
As a result, demand for housing is very low -- and home prices reflect that. The median home price in Buffalo was only $94,000 for homes sold during the first three months of 2012, according to the NAHB. That's far below the national median of $162,000.
Fortunately for home buyers, incomes aren't as depressed. The median income here is at just about the national level, making it very affordable to buy a home.
As in many once-booming Midwestern cities, Grand Rapids was built up during an era of prosperity and high population growth. Now it's left with a large inventory of fine, old houses that are weighing on home prices.
In addition, several local non-profits are working to save area neighborhoods by renovating older homes and renting them out or reselling them, said Kara Wood, the city's director of economic development.
With population growth slowing over the past few decades -- the metro-area population grew at about half the national rate over the past 10 years -- there's more than enough homes to meet buyer demand.
Meanwhile, the city's economic base, which once relied heavily on the furniture-making industry, has become more diversified. Health care is now a driving force in the local economy, said Wood.
And there are plenty of good-paying jobs. Spectrum Health, which runs several hospitals in the area, employs more than 16,000 local residents, plus 1,500 physicians.
Modesto would make the perfect poster child for California's housing bust.
Construction and home prices both boomed prior to the 2006 peak, as buyers sought homes that were cheaper than those on the coast, according to Daren Blomquist, a spokesman for RealtyTrac.
"People bought there even though they worked far away, closer to the coast," he said. "They were willing to make that commute to get lower prices."
Much to those buyers' dismay, once the bubble burst the prices kept falling. Home prices in Modesto have sunk 67 percent from their 2005 peak to the current median of $127,000, almost $40,000 below the national level.
Foreclosures still plague Modesto. The metro area had the second highest foreclosure rate in the nation during the first quarter of 2102, with foreclosure paperwork filed on one out of every 60 homes, according to Blomquist.
Meanwhile, the unemployment rate stood at a very high 17.4 percent in March, more than twice the national rate. Families with working members, however, can easily afford the beaten down home prices in the area.
Located on an interstate highway between Tampa and Orlando, Lakeland's residents are used to people just passing through. But those who decide to stay don't find it very difficult to afford a place.
While both home prices and incomes have been hit hard here over the past several years, the decline in home values has far surpassed falling wages, said Ken H. Johnson, professor of real estate at Florida International University.
Home prices have fallen 58 percent since the housing bubble burst, to a median of $85,000. Taxes are also low. With today's low interest rates, a family who buys a house at the median price and puts 20 percent down would have a monthly payment of under $400, including taxes.
Meanwhile, the jobs picture is improving. Long a pit stop for travelers, Lakeland has recently become a destination, thanks to the opening of the Legoland theme park in October.
Legoland now employs 1,000 people. And a water park just opened this month, which should create even more jobs. That should help to further improve the unemployment rate, which fell to 9.5 percent in March, down from 11.3 percent the year before.
Dayton is shrinking -- or at least its population is.
The metro area lost about 1 percent of it residents over the past 11 years as businesses, like NCR Corp., moved out of town and others cut staff.
While that hasn't necessarily been a good thing for the local economy, it has kept homes extremely affordable. Since there's such an ample supply on the market, home prices have come down significantly. The median home price in Dayton is currently $81,000, about half the national level, according to the National Association of Home Builders.
Luckily, the employment picture is improving, too. The unemployment rate fell 1.2 percentage points over the past year to 8.2 percent, close to the national rate.
From its mainly manufacturing roots, the state's capital has greatly diversified, attracting employers in the health care, pharmaceutical and retail industries. Even tourism has become a big industry here, as sporting events like the famed Indianapolis 500 and the NCAA basketball championships draw crowds each year.
All of that has helped Indianapolis' population bring in a median income that is on par with the nation's as a whole. Housing, however, is much cheaper than the national average, making it a lot more affordable for local residents to buy.
Helping to keep prices down is the fact that there is so much room to grow. "There's an ample amount of land available for housing development any time there's a rise in demand for housing," said Kyle Anderson, a professor of economics at the Kelley School of Business of Indiana University.