When you find your dream home, your financial life isn’t always in order. Without substantial credit history and a low debt-to-income ratio, getting approved for a conventional mortgage loan is a challenge. There are a variety of creative financing options available to help you purchase a home. The flexibility of creative financing makes it easy to quickly close on a home with little stress.
Owner financing occurs when a buyer receives financing directly from the seller instead of a mortgage company. The transaction is secured through a down payment and a promissory note created by you and the seller. The promissory note details the amount of the purchase, your interest rate and the terms of the financing. For example, a seller can finance to you for 30 years or opt for a shorter term such as five years and require a balloon payment at the end of the term.
A balloon payment means that you are responsible for refinancing to pay for the home in full at the end of the term. It may be worth it to negotiate short term financing if the seller is charging a higher than average interest rate.
With owner financing, you are the legal property owner by way of the signed promissory note. However, with a lease option, you are considered a tenant until the end of your lease term when you are expected to obtain a loan to purchase the home. Down payments are sometimes required, but a seller can delay the down payment until you actually close on the home.
Lease option terms vary. A seller looking to quickly rid himself of a home may request a lease term of a year while a more flexible seller could allow you up to 3 years to find financing. While you are a tenant, the seller is liable for the mortgage debt and maintenance of the home.
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While less common than a lease option or seller financing, a wrap mortgage is a viable financing option for many home buyers. Wrap mortgages occur when you and a seller creates a second note in addition to an existing mortgage. For example, if a home is worth $200,000, but the seller still owes $100,000, you can take over the payments on the $100,000 loan and create a note for the remaining $100,000 less any down payment.
The interest rate is set by the seller, but is usually comparable to market rates. This scenario works best when the seller’s mortgage is assumable, or the lender allows another borrower to take over payments.
Attend a real estate auction to find a home you can purchase in cash. If you have significant savings, you can find a wide range of deals at real estate auctions. Certified funds are usually required to register as you are required to purchase the property in full upon placing the winning bid. Real estate auctions may have homes starting from as little as $10,000 on up. Auctions aren’t the only place to find discounted homes. Some foreclosed properties are drastically discounted in poor market conditions and can be purchased with a credit card. Homes may need additional work, but you can either use cash to make repairs or charge it to a credit card.
- "Beginners Guide to Real Estate Investing"; Gary Eldred; 2008
- "The Complete Idiot's Guide to Buying Foreclosures"; Bobbi Dempsey; 2008
- Bankrate: No Money Down Home Buying; Elaine Zimmerman
- RealtyTimes: Housing Counsel: Creative Financing -- A Wrap-Around Mortgage; Benny Kass