Bad Credit or Traditional Mortgage? Protect Yourself When Shopping for a Home

By Gina Pogol
Mortgage Credit Problems Columnist

Vickie Asks: Dear Gina, I'm shopping for a new home and wrote an offer yesterday. I just noticed that it says I don't have to complete the buy if I can't get a mortgage. But what if I don't like the mortgage I am offered? If I don't take it, do I lose my earnest money or down payment?

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Gina Says:

Hi Vickie,

Every state has its own real estate laws, but in general, you don't have to close on a home purchase if you can't get a mortgage. However, if you get turned down for a prime home loan but are offered a bad credit mortgage, it could complicate your life. You may not want the home if your interest rate is higher than you expected. To avoid fighting over your deposit or earnest money, make sure your agent adds a disclaimer to your offer, stating that your loan approval must be for a "___ mortgage at a rate not exceeding ___%." That way, you don't have to take a bad credit mortgage or any loan with a structure you don't like. You could, for example, specify that you will only complete the purchase if you can obtain an FHA 30-year fixed mortgage at a rate of no more than 6%.

But that's not the only part of a real estate contract that can affect your mortgage. If the property comes with the furniture in it, know that you can't buy furniture with a mortgage. Mortgage lenders want property, not furnishings, for collateral. So two things apply: the house must appraise at the sales price without the included furniture being considered, and you must not appear to be buying furniture along with the house unless you pay for it outside of escrow. So, in your contract, where it states that furnishings or other personal property like a boat or snow blower is to be included, add the words "conveyed at zero value." This makes it legal; you are only paying for the property, not the extras.

In addition, if your contract includes any unusual sales concessions, like a car or excessive amounts toward closing costs, it can change the appraised value of the property. Is a property that sells for $200,000 but comes with $20,000 in incentives to buy it really worth $200,000? Or only $180,000?

Finally, take a cue from FHA. All FHA mortgages require an addendum to the purchase agreement that states that if the property doesn't appraise for at least the sales price, you are not obligated to go through with your purchase. The Amendatory Clause reads,

It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete to the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise unless the purchaser has been given in accordance with HUD/FHA or VA requirements a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $_________.* The purchaser shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation. The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or the condition of the property. The purchaser should satisfy himself/herself that the price and condition of the property are acceptable.

Even if you don't plan to get an FHA home loan, it is smart to make sure that your offer contains this exit.

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