When I first moved up to Johannesburg and my career was just starting to flourish many years ago, I heard of and spoke to a number of people in a relatively short period of time with above average salaries who had lost everything and had to start over at a somewhat more mature age. I thought they were just stupid and never gave much thought to it, because it would never happen to me. Well, as Forest Gump says "It" happens.
What if the banks won't give me a home loan due to a bad credit record?
As I have mentioned before on my wealth creation site, I had a bit of a financial setback a couple of years ago. I am slowly recovering from that, but there's not much chance of a bank giving me a loan at this stage. I still have 2 judgments against me. However, it is possible to buy a property even with bad credit.
Installment Sale
One option is to buy a property through an Installment sale. This is not necessarily an easy option, but depending on your situation it could be the quickest way to get into the property market. With an Installment sale you need a third party to "give you a loan" and almost act like a bank for a period of time.
Basically, with an Installment sale you pay a certain amount extra for a property than it would sell for in the open market at this stage. Let's say Jack Flash wants to sell his house. He's looked at the market and believes he can sell it for R500,000. After performing a number of rituals including a 7 day fast, dancing naked on the hilltop and cutting off your left ear as a sacrifice, it has been "revealed" to you that Jack has recently won the lottery and has no immediate need for the R500,000, but just wants to get his money at some stage. Having looked at the property market in the area you believe that the value of the property will continue to rise and that it would still be worth your while paying R550,000 for the property. So, you go speak to Jack and offer him R550,000 for his property on condition that he sells it to you on an Installment sale.
With an Installment sale, the loan for the property remains in the name of the 3rd party, Jack in our example. The two of you then sign a contract that states that you are buying the property from Jack. You agree to pay R25,000 upfront, another R25,000 12 months later and a monthly Installment. This contract is completely legal and can be compared to the contract you sign when taking a loan from a bank. Generally there will be a clause that states that Jack may "take back" the property if you miss an Installment or x number of Installments. This is just to protect the 3rd party, who is really taking a risk in giving you a loan. This is true of any loan with a bank as well where they may re-posses the property if you fail to pay your Installments. Make sure you get a professional with experience in Installment sales to draw up the contract for you and explain the details to both parties.
There are two complications here. Firstly you need to ensure that it is worth buying the property at the higher value. It may seem that you are going to loose money if you pay R50,000 more for a property than it is worth. However, you need to look at the average property growth rate in that area and compare it to the current interest rate. Take a look at my explanation on passive income on my website. The following calculation is not 100% correct, but for simplicity's sake. If the interest rate is 10% and the property growth rate is 20%, it means that you'll recover the R50,000 within the first year even without taking the rent that you'll earn from the property into consideration. It means that you may not make as much profit as the next person, but it does help you to get (back) into the property market and work your way up from there.
The second problem is finding a person who is willing to sell their property on Installment sale. I don't know how you do this. Speak to a wealthy uncle or maybe a family member who qualifies for a second bond, but cannot afford the monthly Installment. You'll be surprised how easily banks give a second loan. If all else fails, do the naked dancing on the hilltop, listen to the wind and speak to your animal guide. Where there's a will, there's a way.
Clear your credit record
I know this is stating the obvious, but let me just say it. If you do have a bad credit record, you need to work out a plan of how to get out of that situation. It's so easy to get overwhelmed by financial mountains. You don't see your way clear to paying off that debt, so you just shove it to the back of your mind. Don't do this, the problem just escalates!! Go speak to a financial advisor and be honest about your situation. Ask them to help you draw up a plan to settle your debt and clear your name. Some of these guys are brilliant and know all the legal tricks to clear your name ASAP.
You also need to decide whether it makes more sense to settle your debt first or to buy a property while still paying off the debt. You need to compare the interest rate of your debt with the property growth rate, the interest rate of a bond and the rent you'll earn from letting the property. For example, if the property growth rate is 20% and the bond rate is 10%, but the interest rate on a credit card is also 20%, then it may be better to settle the credit card debt first. Do the math yourself.
An instalment sale is just one method of getting into the property market if you don’t qualify for a home loan through a bank. My point with this article is that it is possible to get a home loan even when the banks tell you it isn’t. The decision of whether you should buy a property at a slightly higher price and while you still have debt to settle is completely up to you and should depend, amongst other factors, on the property growth rate in your area relative to the interest rates of your bond and other credit facilities.
About the Author:
Dirk Wessels is the owner and author of http://www.showcase2look4.com. You may freely distribute this article on condition that you keep this Author bio intact with an active link to my website.
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