Can a Deadbeat Pay Cash?

January 10, 2000 "Can we bypass a credit check by paying cash for a new house? My husband and I have very bad credit. Our house has a current value of $400,000 and our current mortgage balance is $250,000. We want to sell and buy a cheaper house by using our equity and some $50,000 from our savings. Is this possible?" Certainly. If you don't need to borrow money, no one needs to check your credit. Be sure to make the real estate agent aware of your plans when you make an offer to buy the home. Some agents routinely check credit early in the process. However, don't overlook reestablishing your credibility as a borrower. If you are permanently classified as a "deadbeat" your borrowing power will suffer. You never know when you'll need to borrow for some unexpected need, to guarantee the debt of someone else, or to sign a lease or other contract that requires a credit check. A strong credit rating is a valuable asset on a household's financial balance sheet. Unfortunately, many people don't realize that until the need arises -- often when it's time to buy a home. With bad credit, they may find themselves paying 11% interest instead of 8%. You have the option to pay cash, but it is your best option only because your alternative is to borrow under the onerous terms offered to deadbeats. The first creditor to convince you are no longer a dead beat is yourself. When you withdraw $50,000 from your savings to make the purchase, you are effectively borrowing money from yourself. Repay it, with interest, just as if you had borrowed it from someone else. Charge yourself 8 percent, the going rate for a mortgage without points. To pay off the $50,000 loan at 8% over 10 years, pay your account $607 a month. To pay it off over 15 years your payment would be $478. To determine payments for other periods use the "Mortgage Payments on Fixed-Rate Mortgages" calculator on my web site. Playing the role of lender as well as borrower may prove therapeutic because your lender half will be obliged to discipline your profligate half. Self-discipline is more difficult than externally-imposed discipline and, if you manage it successfully, you can take the next step to restore your credibility with others. To begin that process apply for a credit card secured by a deposit and use it to make purchases for which you would otherwise pay cash. Then, make sure you pay the credit card bill on time, every time. Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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