Mortgages: Creative Financing Alternatives
Article will provide brief overview of creative financing mortgage alternatives, highlighting how to assume a mortgage loan, how to receive seller financing, how to buy a home with no money down, and lease options.
Low-interest rates are encouraging many people to take the first step toward homeownership. Those who have never purchased a home may be unaware of how extensive the home buying process may become. Lenders request a variety of documents to verify employment, income, credit, and so forth.
Sadly, many individuals with hopes of purchasing their first home are unable to do so because they do not meet bank qualifications. Reasons for a mortgage denial may include poor credit, recent bankruptcy, foreclosure, and self-employment. Individuals who deny a mortgage may become discouraged. However, there are several alternatives to a conventional bank mortgage. Many lending institutions require a 3% down payment, acceptable credit history, and low debt to income ratio. Fortunately, some private investors and lenders are willing to offer non-conventional mortgages to those who are not ideal candidates for banks.
Creative financing a home mortgage includes a variety of options such as assuming a mortgage, buying a home with no money down, seller financing, and lease-options. Anyone can purchase a home using one of these methods regardless of credit or income. These methods make financing a home quick and easy. In some cases, the new home buyer may even save money.
Assumable Home Mortgages
Finding a home with an assumable mortgage is tricky and will require in-depth research. However, once you have located an assumable property, the benefits are endless. Those interested in assuming a home loan should work with a real estate agent or private investors. Real estate investors are ideal because they are in the business of buying cheap homes and selling them for a profit.
Thus, they are likely to have information on finding an assumable mortgage. Of course, if you are also in the market of assuming a mortgage for investment purposes, a real estate investor may not be as willing to offer assistance. On occasion, a real estate agent may receive property with an assumable mortgage. Those interested in purchasing a property should inform their agent of their interest in assuming a home. Only two types of mortgages that are assumable – adjustable rate and FHA loans.
Once you locate an assumable property, the buyer interested in the property should obtain and review loan papers. These papers will indicate the original loan amount, payment, and terms. The next step is to contact the lending institution and request an assumable loan package. The buyer will have to meet specific requirements before assuming a loan. Still, assumptions may be more comfortable than applying for a new mortgage. Some lending institutions require that those considering the home mortgage pay a minimum down payment. In most cases, the new mortgage holder will only need to prove income and have acceptable credit.
Assuming a mortgage is a more attractive feature when a buyer has a substantial amount of cash on hand. The new buyer will generally have to offer the seller the difference between the loan amount and the selling amount. For example, if a home is selling for $100,000 and the payoff for the loan is $80,000, the person assuming the loan will pay the seller $20,000 in equity, and continue to pay off the remaining balance of $80,000. There are instances when a person may assume a loan without paying capital to a seller. This situation is common when the original homeowner is a motivated seller or deceased.
Buying a Home with Zero Down
An additional reason why many people are unable to purchase their first home is that they do not have money for a down payment. Fortunately, there are several first time home buying programs and down payment assistance programs to help. Future homeowners should contact local lenders and ask for information about “no money down home loans.” In most cases, home buyers are required to attend a home buying workshop before they are eligible to receive assistance. Real estate agents and online mortgage brokers also offer helpful information on receiving home loans with zero down
The downside to home loans with zero down is that many have income restrictions. It is great for lower income individuals, but not good for everyday hard working individuals. Nonetheless, mortgage brokers are generally willing to diligently search for loans for individuals with little or no money for a down payment. Those interested in buying a home with no money down should be aware that these home loans may carry a higher interest rate. Many lenders consider “no money down” candidates risky. Thus, they increase the interest rate of a loan to compensate. To avoid a higher interest rate, future homeowners may consider adjusting their spending habits to save money. A down payment of as little as $2,000 can make a difference.
Seller financing is the perfect alternative for individuals who are unable to receive traditional funding for a home loan. In this case, the seller acts as the lender for the property. Instead of making payments to the bank, the new owner will make payments directly to the seller. The buyer and seller will agree on financing terms which are typically shorter than a traditional mortgage.
At the end of the term, the buyer will likely owe a balloon payment for the property. Seller financing is excellent for individuals who are rebuilding their credit. They agree to seller financing for three or four years to allow time for credit improvement. Once their credit is acceptable, the buyer will finance the balloon payment with a traditional lending institution. They use the money to pay-off the original owner and begin making regular payments to the bank.
A lease option is a contractual agreement between a seller and buyer that allows the buyer to rent a property as they save money for a down payment or while improving their credit. The buyer locks into a future purchase price and agrees to buy the property within a reasonable amount of time. Buyers and sellers should obtain a lease option agreement and establish the following terms:
- Future Purchase Price
- Maximum Length of the Agreement
- Monthly Rental Price
Some sellers place a clause in the lease option agreement requiring buyers to pay a penalty fee if they decide at the end of the term not to purchase the property. Also, if a percentage of the buyer’s monthly rent was being held in an account to assist with their down payment, the seller has the right to refuse to refund this money. Lease options are ideal for both buyers and sellers. Before signing a lease option contract, both parties should have the forms reviewed by a real estate attorney.