How to buy condo unit with bad credit!
Buying your first condo is a wonderful, scary experience! As with any home purchase you need to have a plan of action! Surprisingly, calling up an agent is NOT your first step! Here are few tips on how to buy a condo unit.
1. Check your credit
Unless you plan on paying cash for your condo you will need a mortgage. If you have any credit problems, fix them BEFORE you apply for a mortgage. As an ex-bill collector I know that an inquiry from a mortgage company on your credit bureau, and a consequent call to me…meant they turned you down for a mortgage until you clean up the bad debts. In most cases we would give a discount, sometimes of more than 50% depending on the age of the debt, if someone called us up out of the blue to pay off a charged off debt.
When we would see that mortgage inquiry it meant NO discount AND maximum fees. Why? Because we knew if you wanted that mortgage there was no need for us to beg or tempt you with a huge discount to pay off an old debt. Sometimes we might compromise and give someone 10-25% off the debt, but it was NO WHERE near what we would give that person if we hadn’t known about the mortgage.
2. Fix Your Credit!
Buying a condo with bad credit isn’t impossible. But you will qualify for less, and pay more. Just food for thought!
Start at least 6 months before your start shopping for your new condo. You will be required to pay off any open collections so make that a priority. When you negotiate with the collection agency focus on getting them to agree to a “paid for deletion” You will probably have to pay more for this. But in the long run, it will not only get that collection off your credit report but your credit score will really go up a lot.
Your online credit score may not be the same credit score your mortgage broker will see!
Don’t forget to re-order your credit from all 3 credit bureaus and look for errors. Don’t focus on your score! Many credit scores given to consumers are “educational” credit scores and a lot of times, the score is WAY different from what you will see when a mortgage broker pulls it. Just look for items that will have a negative effect on your score and try to fix as many of those as you can before you apply.
3. Don’t neglect your savings / financial situation
You will need to have a deposit to put down. Even when you have excellent credit they expect you to be able to put something towards your homes down payment. Some people spend so much time focused on their credit they forget to look at building their security deposit.
To avoid paying PMI , you will need to be able to put down 20%. PMI insurance doesn’t do anything FOR YOU! Its there for the benefit of the lender. PMI insurance ads an additional $30 – $70 a MONTH to your mortgage. It doesn’t pay down your loan at all!
You can find a conventional mortgage that doesn’t require PMI nor does it require 20% down. But most of these will have a higher interest rate. Be careful with these types of loans.
Also don’t forget to not only save money for your down payment. But focus on reducing your debt! Not only will reducing your debt, increase the amount you have available to pay for a mortgage. But your credit score will increase the lower your debt to income ratio becomes!
4. Research your market
Use a few sites like Zillow. Here in Houston we have Har.com where you can look at the prices of homes in the neighborhoods you want to live in. Start using online calculators to figure out how much you can afford.
Don’ t skip this step or you may sign up for a mortgage loan that is financial death! A few years back,
interest only loans were very popular. They allowed you to move into a house paying the interest of the loan only for a period of time. These loans were originally for investors who didn’t plan on holding on to the property for very long. The mortgage brokers sold these to people who wanted to be in ‘A’ neighborhood but could only afford ‘C’ neighborhood. They would advise the client to as soon as possible get into a new loan. But here is the problem with these sort of loans.
- You don’t build up equity. You are paying the interest only. Which makes refinancing almost impossible.
- You can sell, if your area has gone up in value. But that kind of defeats the purpose of you buying your condo to be forced to sell it!
- Depending on how the loan is structured, you may have a large balloon payment
Another loan to be wary of is the Adjustable rate mortgage. This mortgage can be interest only but it fluctuates each month based on the market. Some months you will be paying less then others.
By taking the time to do your research and know how much you can afford with a more conventional mortgage. You have time to PLAN. Maybe your target market is a bit out of your price range. You can make the decision to find one closer to your price range. Or put off buying in your target neighborhood for another year while you save your money up.
5. Make a list of “MUST HAVES”
Have a clear idea of what are the most important features your home should have. When I was buying my condo I knew what part of town I wanted to live in. On the top of my list was location. You can always upgrade a unit if it doesn’t have the granite counter tops you want, but you can’t change its location! If you have children, you may base your decision on the school district you want them to be in. The top 5 things on my list were
- Extra cost like HOA dues
- Building amenities
Granite counter tops and such didn’t make my top 5 (but where in my top 10) simply because I know as the daughter of a “house flipper” you can add those later. Sometimes its even better to have to upgrade since its your choice and style of upgrade and not someone elses. Of course if you have to upgrade remember that’s not cheap. You have to factor that into the house price. The cheapest kitchen renovation my dad ever did was for $8,000 and that was just for new counter tops, flooring, buying a new fridge and refurbishing the cabinets. Keep in mind he is in California, and he gets a STEEP discount since he tends to buy in bulk. So the cost of these upgrades will vary based on your location.
6. Choose Your Agent Wisely
Never discount the benefit of working with a great agent! I know some people think they can find a condo on your own, and you can. There are lots of sites that give you access to the MLS in your area. The benefit of working with an agent that is familiar with the area of town you want to move to is that they know the area from another prospective. They sell property or help homeowners sell their property in the neighborhood you want to live in.
When I was searching for an agent I went thru 3 agents before finding the one I felt could represent my interest the best. Don’t feel obligated to just go with the first agent you meet! Also don’t feel obligated to go with someone a friend refers to you. I learned the hard way to go with my gut! I had an agent that in middle of a bidding war decided to wait until the next morning to submit my counter offer, even though the other agent said it needed to be in by 5pm the previous day. I lost the condo in the building I wanted to live in. I found out from the other agent that my counter was higher and his client actually hoped the winner of the condo would back out so he could accept my offer! I of course fired my agent and decided to interview several other agents before I finally found one that I thought “got me”, understood what I was looking for, and was aggressive enough that I knew my counter offers wouldn’t sit on his desk!
Believe me, you will regret working with a bad agent, one that isn’t familiar with the area you are buying in, or one so busy that its hard to get them on the phone. Don’t be shy! INTERVIEW YOUR AGENT!
7. Get pre-approved for a mortgage
Once you have your agent. They usually have a list of banks and brokers they work with a lot. This is very important, especially if you are new to an area. Having worked with brokerage firms in the past. I know some of them are totally on the “up and up”. While some have so many hidden fees that even though they quote you a low interest rate, the fees you pay at closing are a LOT higher and they are all going to line their pockets!
Don’t be afraid to interview them! And if they have any tips to help you get approved, listen!
You should already have a good idea of what the prevailing interest rates are and how much you can afford. You have already cleaned up your credit as much as you can. So its safe to have a mortgage broker pull your credit.
Your mortgage broker should be able to get you a pre-qualified letter so that you can include it with any offers you make. This will make your offer stronger then most of the others (except for a cash buyer) who just send in an offer.
Even if you find yourself in a bidding war, most homeowners will go with the person with the financing in place.
8. Read the homeowner’s association’s document.
Once you offer has been accepted, the owner needs to give you the HOA documentation. Read it! You need to know and understand the rules of living in your building.
Examine the condition of the building and its HOA.
When I was looking at building that I loved, I found out that several of the current owners in the building where suing the builder and the HOA for shoddy workmanship. Lots of problems with the plumbing and crumbling drywall in some units. Right away I knew that even though the unit “I” looked at was beautiful. There was a good chance that within a few years it would be crumbling down around my ears! Also when you buy into a building where there are pending lawsuits you need to be aware that your HOA fees may rise if the HOA loses and is found liable.
When purchasing into a building with an HOA make sure you know what your fee covers. Do they hold insurance for just the outside of the building? If the building is new or recently renovated, what kind of warranties have been given. You really don’t want to buy into a building with a lot of problems or pending lawsuits. As a buyer, you need to seriously consider if you are paying the right price not just for the unit you are offered, but for the rest of the building as well.
Did you know that in some complexes leaving your garage door open all day could be considered a violation? Do you work at home? Some HOAs won’t allow clients to come to your home, or only allow it during certain hours of the day.
Like parking out front of your home? Check your HOA docs! This can be a violation also! Not all HOA are strict, but some are and you need to be aware of this. Once you have your HOA docs you have a few days to sign off on them stating you agree. If you don’t agree you can back out of the deal. Keep in mind you are on a time limit. If you wait 3 weeks to read the HOA docs and then find that you don’t agree, you won’t be able to cancel your condo purchase.I hope you found this article helpful. Enjoy your condo hunt!