Can I do Nomad with a bankruptcy?
Often times, the reason why someone may find themselves in the Catch Up Nomad position is because of some financial setback that happened in the past. Many times this results in a Catch Up Nomad in having a past bankruptcy.
So, the next logical question is: can someone do the Nomad model if they've had a past bankruptcy?
The answer is: yes, you can do the Nomad model if you've previously had a bankruptcy.
Loan programs vary over time such that loan programs that are available today might not be available tomorrow and loans programs that don't exist today may be available tomorrow.
With that being said, there are loan programs, like FHA, where you can get a loan 2 years after your Chapter 7 bankruptcy has been discharged. You can get an FHA loan with 1 year of on-time payments during a Chapter 13 bankruptcy with the approval of the bankruptcy court. It is my understanding that these same rules also apply to VA loans.
For USDA loans, you'll need to wait three years from the date of discharge of your Chapter 7. However, you can get a USDA loan with just 12 months of on-time payments on your payment plan for a Chapter 13 bankruptcy. You can also get a USDA loan a year after the Chapter 13 has been discharged.
So, you'll be able to get your first Nomad property relatively easily after bankruptcy (your first two if you and your spouse are alternating loans). What about additional properties?
The typical loan that we recommend for Nomad is conventional financing and they happen to be a bit longer wait after a bankruptcy. How long? 4 years after a Chapter 7 discharge to be able to qualify for a loan or 2 years after a Chapter 13 discharge. If your Chapter 13 was dismissed without a discharge, you'll need to wait 4 years from the date of the dismissal.
Now… I've also heard, from time to time, of special bankruptcy friendly loan programs with higher interest rates. In the right situation, I'd probably be OK with these as well.
Should I buy a home to Nomad subject to?
So, you're interested in the idea of using the Nomad model to acquire rental properties. But, maybe you've got some credit challenges that are preventing you from getting traditional financing. So, you're considering buying a home creatively by agreeing to make payments on a Seller's mortgage and buying the property “subject to” the existing financing.
Is buying a home “subject to” to do Nomad a good idea?
In two words: probably not.
If you can qualify for traditional financing you should do that. The idea behind the plain vanilla version of Nomad is to lock in long term owner occupant financing with little or nothing down and then convert them to rentals.
Subject to deals are typically not recommended to hold for a long period of time. So, you probably won't be holding a subject to property for 30-40 years.
However… and it is a big however… if you have ample cash reserves and have a credit challenge that is preventing you from getting traditional financing and you happen to be experienced with creative financing strategies like subject to, I would say you can (with my reluctant permission) do a subject to deal or two to acquire short term rental properties while you are improving your credit situation.
Should I buy a Nomad property using a lease option?
You like the idea of using the Nomad model, but maybe you have a challenge that is preventing you from getting traditional financing to buy Nomad properties the way that we normally recommend (with owner occupant financing). Maybe, it is lack of job history, maybe it is a credit challenge, maybe it is a bankruptcy, short sale or foreclosure.
Whatever the reason: you're considering trying to find a work around for buying using the more traditional financing that we normally recommend for Nomad. And, you're wondering to yourself… can I buy for Nomad using a lease option?
Well… for clarity… you are not technically buying a property on a lease option until you actually exercise your option. Until you do that you're just renting the property and have the right (but not the obligation) to buy.
If you can't get traditional financing, I would be OK with doing a lease option as a temporary backup plan. For me to be OK with it, you'd need to get excellent terms on the lease option.
Should I buy homes creatively?
So, you're thinking to yourself… should I buy homes creatively to do Nomad? Maybe you should try to to find a property that you can buy on a lease option or get a little more creative and find a seller that is willing to allow you to take over payments on their loan and you can buy it subject to the existing financing. Not so fast.
The Nomad model does not, in any way, require that you even consider buying properties creatively. It is by the very nature of it having you get owner occupant loans, a traditional financing approach to real estate investing.
Will some people that have extra time, desire and skills want to supplement or tweak the traditional Nomad model to include creative financing strategies… sure. However, hear my words: you do not need to nor would I recommend that you even seek out information on how to do these types of transactions. It is a shiny object that will distract you from the prize of just doing the Nomad model as it was designed.
And for those of you that think… he's not recommending them because he's like a large number of other real estate agents and does not understand these strategies and the benefits of doing them… au contraire… I've taught a large number of classes on all of these creative strategies to real estate agents and real estate investors.
I understand both the pros and cons of each strategy better than most. My advice to you when it comes to buying creatively and Nomad: don't worry about it… focus on just implementing the traditional financing Nomad strategy.