Jan 20 2008

Don’t have good credit or a down payment? Then don’t buy a house!

There’s a story in the Pittsburgh Tribune-Review today that got me thinking.

It’s about the so-called “mortgage crisis” that’s going on.

Credit scores, larger down payments and income and asset verification are among the realities facing homebuyers in the Pittsburgh area as lenders comply with more stringent guidelines — a result of the mortgage/housing crisis that hit the nation last summer.

So-called subprime loans, the kind that have been available to people with poor or bad credit — and blamed for exacerbating the crisis — are either scarce or nonexistent, here and elsewhere.

–(Taken from the story)

If people have poor credit, why in the world do they need to be homeowners?

They don’t.

If a family has poor credit, there’s probably a reason for them to try to buy a house. Either reckless spending, not enough income, huge medical bills, whatever–something caused their credit to be bad.

A mortgage company should NOT approve people of these loans, especially subprime loans.

Those people already present a credit risk, so why give them a loan? It won’t end well for most borrowers.

The article goes on to tell the story of a few people who recently bought homes. They had to put 3 percent down. Last year, with their credit rating, they could have bought a home with no money down.

Three whole percent down? Wowie.

If people have no money to put down on a home, then they shouldn’t try to buy it. And, mortgage companies shouldn’t help them buy that house.

Not everyone needs to own a home. Just because a person thinks they should live in a house doesn’t mean they should.

You can rent a house or rent an apartment.

Be a renter, cut your spending, clean up your credit, and save up for a sizable down payment. Isn’t that what people did way back when?

Though my husband and I have excellent credit and a decent income, we don’t have anything saved up for a house. We wouldn’t dream of trying to buy one now, and no company in their right mind would give us a mortgage.

We’ll rent our apartment for awhile, save money, and buy a house we can afford on down the road. Check out our plan on how we’ll do this.

What do you think of this “mortgage crisis”?

10 Responses to “Don’t have good credit or a down payment? Then don’t buy a house!”

  1. Yes and no. I agree with you in that some people with poor credit shouldn’t be getting approved for mortgage loans. However, the way the industry currently works an assessment of who has good or bad credit is based mainly on a look at their FICO score. Unfortunately there are many things that infuence this number and some may not necessarily mean that the indivudual at that particular point in time presents a credit risk. For example a collection item, or a few late payments from a couple of years ago can lower your FICO number. The same happens if you don’t have enough credit history. So an assessment on a FICO score is not adequate for people who maybe had problems in their past but have cleaned up their act recently. I also agree with having a downpayment. However, there are certain areas in this country were house appreciation outpaces the savings rate for individuals saving for a downpayment. Granted nowadays there aren’t very many areas like that but that’s how people got in the current trouble they are in. If they had waited to save for a downpayment they wouldn’t have been able to save enough. We are a good example of that. When we bought our first home (4 years ago, when the market was rising) we were able to put down 5%. In the period we owned that home (2 1/2 years) it’s value went up 33%. In those two and a half years we would have had to save an additional 20K in order to have the 20% ideal downpayment.
    I think the current mortgage crisis was created by loose lending standards and overspenders. There were a lot of people who thought their house would appreciate faster than it did or who thought their income would increase at a higher rate than it has.

  2. I’m not sure I agree at all. I do agree that some people who have bad credit are not cut out for home owning. Some people have bad credit from bad mistakes they made in their past and are working on it. Some people have bad credit because they CONTINUE to make bad decisions.
    My husband and I have bad credit because of mistakes we made in the past, as well as Doctor bills. We have been working on paying off our debt, and we haven’t gotten into any situations to make more debt. We are working on saving a down payment as well as paying off our debt, but we are not going to wait until our credit is perfect to buy a house. It would take 7 years for those mistakes to be erased; even after they are paid off and closed. Why should we continue dumping money into a rental when we could own for cheaper than what we are paying to rent?
    Medical bills pile up fast and I don’t think they should be held against a person, especially if they are working on paying the bills off.
    Although the thought of no down payment sounds nice, I think that is a bad idea. It only makes sense to have a down payment, not only does it prove to the mortgage company that the buyers are interested, but it also makes the amount borrowed lower, which makes the payment lower. Makes sense right?!

  3. I agree with Kacie. What I got from what she wrote is not that any bad credit should keep you from buying a house, but that if you have bad credit because you are bad with money and have debts, then you probably aren’t prepared to buy a house. And if you can’t afford a down payment, how will you afford your monthly payment and interest with enough left over for emergency expenses? You’ll be more likely to default in that case. Buying a house is a big deal and should not be taken lightly by anyone, regardless of income. Home buying isn’t a privilege for only a select group of people, but it isn’t a necessity, either. It’s something you work towards. I think this connects to the discussion from last week on whether buying a house should be considered an investment or not.

  4. Thanks Bethany–you cleared up some things I was trying to say.

    This whole mortgage crisis happened in part because people who had no business taking on mortgages did so anyway.

    Jes, I agree–people who put a down payment will better prove their credit worthyness, and will also borrow a less amount.

    Mercedes- you hit on a key point: You can’t borrow money expecting your income to increase, or your home value to rise. There’s no guarantee that any of those things will happen, and we’re seeing the consequences.

    By having a larger down payment, not borrowing as much as possible, and locking in at a fixed interest rate, we’ll protect ourselves from times when the economy is down.

  5. Housing is a touchy subject. But I agree with your point–no one needs to own a house. Almost never. There are houses to rent and because you don’t have to pay upkeep and property taxes, they probably cost less than a mortgage.

    Then you have a chance to get your credit in order and establish a good record as a renter. Hopefully if/when you decide to buy later you’ll be much better prepared. Maybe you even saved for a good down payment.

    Unfortunately, there are a lot of books out there (I see them at the library) on how to buy houses with bad credit and no money down. Very scary. Those are the kinds of books that I want to throw away or hide…

  6. It is a shame that so many people ended up the way they have, in foreclosure or bankruptcy.

    I think it is partly the mortgage companies’ faults for letting these people purchase the homes in the first place.

    Credit or no credit, these people were buying homes they just could not afford.

    We live in the southwest and there have been some incredible news stories relating to illegal immigrants who were given mortgages they couldn’t afford and then fled the country.

    While the people and the mortgage companies are both to blame, it is the rest of us who pay the price.

    The housing market takes a fall and so does our home equity and property values. It is a shame really.

    I just hope people learn some lessons from this.

    Take Care


  7. Well it wasn’t just the fault of the consumer here. Everyone dreams of owning a home and mortgage companies were very sneaky with their hidden fees, adjustable rates etc luring many unsuspecting consumers into attaining their dreams faster than they ever thought possible. I think that when the initial loan papers were signed, people were given very low payments making them think they could afford it when the couldn’t. The little snag was the adjustable interest rates. When someone has a mortgage payment that almost doubles in a month, it is going to be difficult to pay for that. I think that many consumers did not fully understand their mortgage terms, and the mortgage companies made the lending too easy and too attractive. Couple the rising interest rates with rising gas and oil prices, groceries and other daily living expenses, the economy is in trouble. The only difference this time around is ALL the factors are in place to cause a recession, when usually it is one or two of these factors in place to set it off. Bottom line, consumers trusted the banks to treat them fairly and it didn’t happen. Good credit or bad credit, consumers have been taken advantage of unfairly through shady lending practices. It would be a shame for people to turn their noses up at a person who is losing their home for these reasons when they went into the loan fully expecting to live in their home and raise a family. No one wants to lose their home under any circumstance. It is quite sad to see it happening, in our area it is 2 out of every 3 homes going into foreclosure, and the homeless shelters are overflowing. The government and banks are to blame for being greedy and taking advantage or many well meaning families. It does affect us all, unfortunately, but the housing crisis is only one factor in our economy. What about the absurd gas and oil prices? How many elderly people who own their homes are going to freeze this winter?

  8. I totally agree with the first poster on this one. In our area, home appreciation TRIPLED in the last 5 years. A very close friend of mine had no downpayment, but purchased her home just as the real estate wave began to crest. She sold it 1 year later and made 50 grand. This became her downpayment for a new and much larger home. I came from a similar situation, where I had a small down payment, but only fair credit. My credit problems came from a couple of late payments during college 5 years ago and no longer presented a credit risk because of my income increase since graduation. Because I purchased this home, despite having a small down payment, and despite having only so-so credit, I was able to turn that property around 1 year later and gain a sizable profit to reinvest in a new and larger home. I agree with you that some people own homes that they just cannot afford, but in some areas (again as previous poster said) you would LOSE considerable money by renting rather buying.
    The bottom line is this – you shouldn’t buy a house you can’t make payments on. But if you are SMART about your money and your investments, you can not only own your own home, but create equity as well.

  9. I think the most important step is to be realistic in what you can and cannot do. I’ve seen so many first time home buyers jump into something they cannot afford only because they have big dreams.

    Your priority is to find out what your loan terms are. Ask if your mortgage rate is fixed or adjustable. An adjustable loan rate often causes homeowners a sense of anxiety and urgency since they can end up paying more in only a few months due to a rate increase. A fixed rate is more secure for a homeowner. The rate never changes before you initiate a refinance. I hope this helps!

  10. Kacie,

    I think that there are things two things to keep in mind when dealing with real estate – Location and your specific situation.

    If the property makes perfect sense for you and your family why shouldn’t you figure out how to buy it? The right schools, the right price & monthly payment?

    You say you wouldn’t buy a house because you haven’t saved for it? Why not? What if you found the perfect house, for the prefect price and the payments were manageable? You could qualify for a down payment assistance program (available to anyone qualified for an FHA loan) and the seller can contribute up to 6% of the sales price towards your closing costs. Sellers are desparate and if it made sense they would do it. And in the end you would have a home. This loan also allows for additional funds for renovations – Up to $35,000. Not bad for the perfect situation when all things are considered.

    Keep in mind too that less than 1% of the total housing stock is in foreclosure today. That is hardly a crisis. Yes, people purchased and refinanced homes that they couldn’t afford but no one had a gun to their head.

    One of those homes maybe the perfect home for you both. Great post and keep up the great writing.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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