Should you refinance your mortgage? Interest rates are trending up, but they're still at historic…
Real estate financing doesn’t always have to fit into a nice neat banker box. Financing doesn’t have to involve a bank or even a mortgage. Conventional mortgages involve credit scores and big down payments. Luckily, there are other options available if you know where to look and who to ask.
Consistently low interest rates make mortgages attractive but folks with a troubled credit history may have trouble finding a lender who will let them borrow. Even with a high interest rate, some banks balk at making loans to anyone with credit issues. Additionally, some would-be home buyers aren’t interested in carrying a big loan, no matter their credit rating.
For these people, there are other real estate financing options available.
Also known as owner carry back or owner financing, the homeowner agrees to carry the mortgage. You pay the homeowner and he or she then pays the mortgage company. The owner can obtain a second mortgage and keep the proceeds, using your payment to pay the original mortgage. You both meet with an attorney to work out the details of deed transfer and other details such as confirming owner is actually sending the payments you make to the mortgage company. This is a crucial step as you don’t want to lose your investment in the home if the homeowner defaults on the mortgage payments.
Seller financing often benefits buyers and sellers. This real estate financing option helps a buyer who doesn’t want a mortgage and it helps a seller who might have trouble selling. Remember to involve a reputable attorney to ensure legality and benefit to all parties.
Renting-to-own is a great real estate financing option that gives you time to build your down payment or repair your credit while still getting you into a home. Typical rent-to-own opportunities are set up as a lease for one to three years, after which time you seek alternate financing. A portion of your monthly lease agreement goes towards the purchase price of the home, so you’re essentially building payment into your home before you actually buy it. Again, broker this deal through an attorney so that everyone understands their liability. And be prepared to pay an “option money” fee to the homeowner. This one-time fee is generally between 2.5% and 7%, depending on the purchase price of the home and is considered the homeowner fee for the rent-to-own contract.
If you currently own a home, consider downsizing to a smaller one. Depending on the equity you’ve built in your current home, you may sell for enough to more than pay for a smaller home. Or maybe you want to move to a different area where the cost of living is less than where you are now. Cashing out may be a great option for you.
This option might not work for everyone, but if a family member has equity in their own home or is comfortable enough financially, they might work with you to help finance your home. Cash, leveraging existing equity, tapping savings, or even working out a reverse mortgage are options available for family member who have trust in your intentions to reimburse them. A formal mortgage repayment plan is a requirement. Your family member must also charge you interest, or the IRS can consider the money a gift and tax you heavily for the loan.
If you really don’t want a mortgage, there are other options to consider for real estate financing. Crowd-funding has become popular in recent years, and it might work for your situation. You can also choose to live with your parents for a while and save for a home. Additionally, if you have a spouse or partner, you can arrange to live off one salary and save the other for your home purchase. This option obviously has its own challenges, but if you can do it, you can save for a home in as little as a few years.
The Bottom Line
Alternatives to conventional real estate financing are out there. If you’re willing to be creative and patient, you’ll be in your dream home soon!