Expert: Matt Heisler - 8/26/2011

Question
Hi there. We live in Evanston, Illinois. My husband and I have the money to put down 20% on a home purchased at or below 500,000. We have calculated the monthly cost with taxes, insurance, p&i, and can afford the payments. Where we live there are some great deals available in the neighborhood we want, and rates are low. However, since we are independent business owners, we were rejected for a loan. My parents are independent business owners as well, and even with them purchasing it with us, we were rejected. They can't even buy it in their name because they already hold 5 small mortgages on investment properties.
We do have a real estate agent that we work with and we are looking at what our options are. The owners of the house we want would be perfect candidates to propose a Sale on Contract purchase.
Is this a wise idea? too risky? could interest rates sky rocket in 5 years just when an adjustable rate is expired?
I am familiar with the basic concepts of buying on contract but, I do not know all the fine print, and haven't been able to find this information on line.
Our other option is to convert our two flat into a single family home. This would certainly cost us more than 100,000 and still wouldn't give us the ideal amount of space we are looking for. Furthermore, our business doesn't allow us much free time to be going through a gut rehab.
I really want to get more opinions about a contract sale. It seems this is becoming more common since banks are tightening their belts more and more.  
Thank you for your expertise!

Answer
Hello:

Two main thoughts:

A) Apply to local banks with small footprints, and find one that is holding on to loans instead of selling them.  If your home expenses are 25% of your AGI, you'll find a bank that will do the loan with 20% down.  Maybe not a 30 year fixed, maybe not at 3.99, but it's definitely the easiest way to solve your problem.  If your home expenses exceed 30% of your AGI, well, then IMHO you can't really afford a 500K house, and you should do something cheaper.  

B) I don't know what a sale on Contract purchase is, or at least what you think it is.  All sales are based on contracts.  It sounds like you want to do some sort of rent-to-own type of arrangement, and in general, they are bad deals for buyers and sellers.  They are exceedingly rare, because they rarely make sense.  Many lenders will do deals for self-employed after just TWO-YEARS of sufficient income, so wait a year and purchase then.  

As a self-employed professional (most Realtors are self-employed, did you know?) I'm all to familiar with the restrictions on purchasing.  But there are lenders who will deal with you.  If you can't find anyone who will deal with you, find out why, (debt, income, proposed debt) and fix that.

Matt Heisler
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