Recently, the Dayton Business Journal had an article indicating that 7.2% of Ohioans don’t have a bank account. The article goes on to say that those unbanked Ohioans pay over $65 million dollars in service fees as a result of not having bank accounts. And while that is a lot of money being paid by the folks that can least afford it, I was really focused on the prospect that people without savings and checking accounts couldn’t buy homes. Seriously, how can you hope to own your own home if you don’t have savings and checking accounts?
Loan officers ask for a lot of paperwork when you apply for a home loan, including copies of your bank statements. We ask for the same documents when you apply for down payment assistance. So, why do lenders want your bank statements? They are looking for the three C’s of underwriting a loan.
- Credit Reputation: Your credit score, delinquent payments, bill collections, types of credit accounts, credit balances, and credit limits all go into determining your credit reputation. The lender will want to know if you have maintained a balanced bank account with no overdrafts.
- Capacity: Do you have the ability to pay back the loan? Banks will be looking at debt ratios and income. They will also factor in things like cash reserves, type of loan, and employment history.
- Collateral: How much equity or down payment can you apply towards buying a home? What kind of property are you buying? Is the property a condo, multi family, or manufactured home? Will the property be your primary, residence, second home, or an investment property?
You see, lenders have a legal responsibility to ensure that you can be reasonably expected to repay the loan. So, they ask for your bank statements. If you can’t provide statements from savings or checking accounts, you will have a tough time providing the proof needed to answer questions about the three C’s.
At this point, we should consider another question entirely. Why is an individual unbanked? Do they not trust banks? Have they had trouble managing their money in the past and can’t open a bank account as a result? The reason I ask these questions will become evident in a moment.
If you are unbanked and want to buy a home, you could bypass the conventional lending system entirely and look at alternative methods of buying a home, such as lease to purchase agreements, private financing, and land contracts. Each of these methods has it’s own set of pitfalls that you need to understand. As a matter of fact, we have an entire web page devoted to warning you about the downside of lease to purchase arrangements. We certainly would not recommend any of these solutions to someone who is struggling to manage their finances. The risk of digging yourself into a deep financial hole is just too great.
If, you are responsible with your money and just choose to not have a bank account, a lease to purchase or land contract may be a viable option for you. However, I would still recommend that you meet with a professional housing advisor (Like the advisors at the HomeOwnership Center) so that you are fully aware of your options and risks before pursuing any of these alternative means to buying a home.
If you are unbanked because of past money management issues, the best solution is for you to tackle your financial problems head on. You need to establish good financial habits, open a savings and checking account, create a good credit history, and put money into savings.
There are other reasons for establishing bank accounts:
- You will earn interest on the money you save.
- Your money is safeguarded and insured by the Federal Government.
- You will build a relationship with a bank or credit union.
- Lenders will be able to verify your ability to save money.
- You will gain access to other bank and credit unions services such as credit cards, car loans, and financial advice.
This is not an easy process. Building a solid financial foundation takes discipline, time, and hard work. However, you don’t have to do it alone.
The HomeOwnership Center’s Mortgage Ready program was created for the sole purpose of assisting those with bad credit, no credit, or past financial problems. In the program, you are given your own financial coach to educate, guide, and motivate you along the way. The entire goal of the program is to show you how to improve your finances so that you can buy a home of your own.
The bottom line? If you are unbanked due to past financial mistakes or if you have a bad credit history, there are steps that you can take that can lead you to homeownership.