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My business partner is trying to get financed for a home loan. He has a poor credit score from his younger years (less than 620) that is very slowly improving. Our business is 7 years old, but has only been large enough to support his family for the last 2 years (only one year of significant income from self-employment based on tax returns). His wife works, but he makes enough to support the family (her paychecks go to savings).

He is trying to buy the home he is currently renting. Monthly rent is $1100. He has never missed a payment in 3 years. Estimated mortgage payments are about $900, so he can obviously afford the payments based on his rental history. He has been having trouble finding a lender because of his poor credit score, and because he is self employed.

What options does he have to buy the home, and what can he do to improve his chances of being approved without major lifestyle changes (i.e. getting a new job, moving elsewhere, etc)?

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    [x] Not obvious that he can afford mortgage payments. What is he going to do if the HVAC system goes out? Does he have the disciple to save an emergency fund? The credit score suggests not. – Pete B. Jun 29 '17 at 19:26
  • @PeteB. He does now, but he didn't 5+ years ago as a 20 year old. They have thousands of dollars in an emergency fund, plus access to company funds in the case of an emergency. – Jacob Jones Jun 29 '17 at 19:28
  • The difficulty is finding someone to look at his individual circumstances, rather than credit score and reported income from the business alone. – Jacob Jones Jun 29 '17 at 19:29
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    The best option is to talk to lenders and see what they will do. A local company/bank/credit union probably easier to work with. – Hart CO Jun 29 '17 at 19:31
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    @JacobJones: My comments were from a banker's point of view. Putting down 20% or more while still having a healthy cash reserve will improve his ability to get a loan. I would talk to the banker at a bank where you he already has a relationship. It could be his personal bank or the business bank. – Pete B. Jun 29 '17 at 19:31
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Why not just do an FHA loan? The minimum credit score is 580, and you can sometimes even go lower than that.

Another alternative is to consider a rent-to-own agreement with his landlord, since it sounds like if he doesn't buy he'd continue renting there anyway.

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Here are some (not all) things that can help overcome a low credit score:

  • Put more money down. The more down payment you make, the better the odds are that the bank will get their money back in a foreclosure
  • Buy a smaller house. This is mostly to facilitate the first option, but it also reduces your ultimate debt-to-income ratio, which is a factor.
  • Get rid of other loans. If he has a car loan, consider selling the car, paying off the loan, and buying a cheap car with cash. That will lower both the amount of debts payments and your debt-to-income ratio.

Getting a new job may actually hurt unless it's a substantial increase in income. Banks usually look at salary going back 2 years, and look for consistent, maintainable income. If you just got a new job that pays more, the bank may conservatively assume that it may not last.

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Take the long term view. Build up the cash.

Once you have enough cash in the bank, you don't need a credit score.

With 6 months living expenses in the bank after paying 20% down on a small house, he should have no issues getting a reasonably priced mortgage.

However, if he waited just a bit longer he might buy the same house outright with cash. When I ran the computations for myself many years ago, it would have taken me half as long to save the money and pay cash for my home as it did for me to take a mortgage and pay it off.

  • Does that include the cost of rent while waiting to buy the house? In his case they are comparable (rent is actually slightly more) because he can't downsize while saving for the house (3 kids with a 4th on the way). – Jacob Jones Jun 29 '17 at 21:17
  • I hate to put it this way, but it's time to break out the beans and rice for a while, while building up the business. Normally people try to break out of this by taking on easy debt worth the intention of paying it off every month. What really happens is that sooner or later life happens and the debts stack up again, and the cycle repeats. I've been there and done that. It is faster to save up than to pay down – pojo-guy Jun 29 '17 at 21:42

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