Low credit score, low down payment, lease ends in April; Advice?

Question

Whatup, Bigger Pockets Nation!

This year is finally the year I can get into real estate! I've been terrible with money in the past; mostly because I've been in low skilled, low paying jobs my whole life...until now.

I was jobless and homeless multiple times in my 20's. I even lived in my 4-door sedan for more than half of 2018 while I finished self-teaching myself to be a software engineer.

2019, things are much different! My current cash flow after expenses is $3,100. However, my credit score is just 625.

Oof!

I'm currently renting a room in a house from an old retired couple. My lease ends in April 2019, but they will let me stay until July if needed. They don't like to have a roommate when the live here--during the winters they live down in Arizona. So, I won't be able to stay much longer than June/July before I need to find another place to rent, or my own property.

I will have enough cash in June 2019 for a 3.5% down payment, closing costs, and still have 3-months of mortgage payments in savings. Thus, I'd need an FHA loan.

My credit score is still likely be 650 or less.

Mortgage would be around $1000 (more like $950, but I'm rounding up) with PMI, interest, property taxes. I can rent out one side for $700, then I'd live in the other side for a year.

So, my question is this: would you recommend buying my first rental property with a PMI or waiting a full year to avoid the PMI? I'd need a full year to get to 20% down.

Regardless of what I decide, I still need a place to live this summer. The question is whether I should rent from someone else, or buy my first property.

What should I be thinking about?

If I can rent out the other side of a duplex for $700 and my mortgage is $1000. That means rent is $300 for myself, then $50 for electric, $50 for water, $50 sewage, and $50 for internet, then I'm looking at $500 it will cost me, which is what I'm currently paying in rent now.

When I move out in a year, I could rent my side out for $500, and they would pay their own utilities. That would be $700 + $500 = $1,200 and my mortgage would be $1,000. Thus, a net positive of $200 (not including repairs, vacancy).

However, if I wait until January 2020, my credit score could be 700 or greater (I think). I'd have 20% for a down payment and I could avoid the PMI.

But, I don't know if mortgage interest rates will increase by then

If I get this first property, then I can more quickly get my second property. However, if I get my first property and I don't make money on it because of the higher interest (because of my poor credit score) and the PMI, then it's a bad decision to buy with PMI.

What's the consensus around here? Is PMI with a low credit score a bad idea? Or is getting that first rental more important because I'll learn the industry first hand by being in the game?

What are your thoughts?

Matt Johnson · Answer

@Cheryl Crockett Yeah, my current debt really concerns me.

I have $11,600 in credit cards ($3,800 is 0% no interest), a $5,400 car loan balance, and my student loans are a bear with a balance of $44,031.

With my current cash flow, I could pay all my credit card debt by May, then by November I'd have $18,000 in savings.

At that point, my credit score would be much higher than the 630 it currently is, I hope.

I love your advice to sit down with a banker too, and then shop for rates at other banks or credit unions.

I'll call my banker on Monday and schedule an appointment.

I'm making things happen this year, and it all starts with taking action and getting the knowledge I need.

Cheryl Crockett · Answer

Congratulations!

Before you do anything else, I advocate boosting your credit score as quickly as possible.

A. My advice would be to find a lower rent situation (even a house-sitting gig that might get you a barter for occupying and maintaining a property for free or reduced rent). Then, put any money you save monthly toward reducing your debt.

B. I strongly suggest having an in-person meeting with your banker or credit union branch manager about your goals and your current situation. And, visit another credit union or bank, where you don't do business yet, to have the same conversation and ask the same questions:

1. Given my history and current situation, what tips or tricks do you recommend to raise my credit score?

2. What services do you provide to entrepreneurs and investors? And how do you stand out from the competition?

3. How can I benefit as a real estate investor if I bring (or keep) my business at your institution?

C. Shop aggressively for lower credit card rates and then go back to your credit card company and tell them what you found. Say that you want to move your business to another card unless they can match or improve upon the competition.

D. Have a chat with your current landlords, before you leave them, and see if they, at least, have any supportive advice for you, and at most, if they would consider an extension to your lease.

I wish you the best!

Tanner Marsey · Answer

probably not the most popular opinion but my personal belief is that saving the 20% is a waste of time. if it takes you a year to save up that much money the market could go up, interest rates could go up, you're missing out on tax breaks and the reality is you're going to be living in one side of the duplex and renting the other one out to cover 80% + of your mortgage.... kind of a no brainer in my eyes but everyone has their reasons.... if the numbers work, I don't worry about PMI

Jason D. · Answer

@Matt Johnson if you have to be out by july, what's the plan from July until you can save the 20%? I would buy now, for a few reasons.... 1) Interest rates are going up, who knows where they will be in a year or two. 2) If your plan is to buy more rentals, the money saved will be put to better use on 2 properties than having 20% tied up in one. 3) If you really want to avoid MIP, you can always refinance when you have 20% equity and get rid of it.

Cheryl Crockett · Answer

Actually, I took my credit score from 620 to over 700 in less than a year, by consistently paying monthly bills on time (or early) and paying my credit card off every month. Once I had a good history of doing that, I asked for and got an increased credit limit.

Aside from that, I pay a little extra on my student loan monthly.

Don't let any part of the path to raising your credit score continue to be a mystery to you. There are people willing to help you get there, if you ask, just like you asked here.

Steve Graves · Answer

Buy now and fix the PMI later. Take all the rent you make on the property and pay down the principal until you can refinance and eliminate the PMI. You can keep on analyzing and possibly miss out on the opportunity. We all make mistakes on our first properties. Just how it is, the school of hard knocks. If you can get into the property and start cash flowing and you like the property I say go ahead and buy it. Like you said, you need a place to live any way, why pay someone else's mortgage.

Matt Johnson · Answer

@Jason DiClemente If I decide not to buy in a few months, my plan would be to rent another room for 6-months at another place from April 2019 to October 2019.

If I do that, I would be credit card debt free and I would have around $18,000 in savings in October of this year. For reference, I currently I have $11,600 in credit card debt and just $4,000 in savings

My RE investment goal is to buy, hold, and rent multiple multi-family units; I want 10+ multi-family units in the next 5 years. By 2025, I want to earn at least $4,000 net profit per month from rental income.

The idea is to buy my first MFH with an owner occupancy loan, live in it for a year, rent out the other unit, then after a year I'd rent out my unit and buy another duplex or triplex.

With my $3,100 monthly net cash flow right now, I will have $18,600 in cash every 6-months (barring any unforeseen expenses). That isn't including any potential rental income or salary increases; it's just what my current circumstances are.

So, while part of me wants to jump at the chance to get a multifamily house right now since I'll need a place to live in just 3 months anyway due to my lease ending, the other part of me looks at how much better of a financial situation I will be in this fall and thinks I should just wait.

I totally agree though, if we get more good economic reports then the interest rates will increase, potentially negating any benefit I'd get in waiting until this fall.

My credit score is 630 now, and I can't imagine that paying off all of my credit card debt would catapult me into a 700+ credit score by this October for a considerably better interest rate.

However, right now, I'm only eligible for amongst the worst interest rates due to my poor credit score.

Sorry, this was super long, but I at least listed my main concerns and goals.

Regardless, I need a place to live in a few months though. So, I'm kinda leaning towards your idea of just buying now.

Matt Johnson · Answer

@Tanner Marsey, I've heard that a lot from many other people, "20% down is a waste of time."

Maybe I'm just accustomed to hearing people saving for 20% down.

The MIP would cost another $85 per month for the life of the loan. For a 30 year mortgage, that's another $30,600 just from mortgage insurance.

I don't know enough about the tax breaks, but I'm now under the impression that I could write this MIP off on taxes as a business expense?

Maybe my focus is just wrong; I'm looking at the debt rather than income.

I was just reading about 5% down conventional loans and the MIP falls off after some time. Maybe I should reconsider the FHA and just go for the 5% so I'm eligible for a conventional loan.

I also have so much credit card debt. $11,500 currently.

Lamar Johnson Karriem · Answer

@Matt Johnson

Honestly I would study on how to be an Realestate Investor where you may learn creative Finance.

Where you have more options then you can leverage the money you have saved.

Like owner financing would be an Example

Jeremy Lewis · Answer

Also a thing to think about would be having a heart to heart with the people letting you stay where you are currently. Write out a detailed plan for saving your money and how you plan to buy a Duplex when you get to the 20% down mark. They may not like having a roommate during the winter when they are there but they have been where you are in one way or another (having a winter home and a summer home) and might take pity (for lack of a better word) on you and let you stay full time until 2020 and perhaps even give you some sage advice.

However, please take your time when composing the plan because the last thing people want to do is read a complicated back and forth 50 page plan on saving up 20% and buying a Duplex haha (unless they're your hard money lender?)

Low credit score, low down payment, lease ends in April; Advice?

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