Top 6 Alternatives To Consider When You Can't Get Traditional Real Estate Financing
In seller financing, the seller takes on the role of the lender. Instead of giving cash to
the buyer, the seller extends enough credit to the buyer for the purchase price of
the home, minus any down payment. The buyer and seller sign a promissory note
(which contains the terms of the loan). They record a mortgage (or "deed of trust"
in some states) with the local public records authority. Then the buyer pays back
the loan over time, typically with interest.
These loans are often short term -- for example, amortized over 30 years but with a
balloon payment due in five years. The theory is that, within a few years, the
home will have gained enough in value or the buyers' financial situation will have
improved enough that they can refinance with a traditional lender.
BORROWING FROM YOUR WHOLE LIFE POLICY
A whole life insurance policy is one that collects cash value over time as you make
your regular premium payments and earn dividends and interest. It’s possible to
borrow against the cash value, and when you borrow from your own whole life
insurance policy, there is no loan qualification process like traditional financing.
While such a strategy increases your borrowing potential, it reduces the face
value of the policy of not paid back.
If you have a whole life policy that you can borrow from, don't lose sight of why you
originally took out the policy. Be sure that the expected benefits of owning
property outweigh the drawbacks of borrowing from your plan.
BORROWING FROM A SELF-DIRECTED IRA
Self-directed IRAs are a tool for investing in a wide variety of nontraditional assets,
one of which is mortgages. A self-directed IRA is not like the Roth or traditional
IRA you may already be familiar with in that the investment options the IRS allows
for a self-directed IRA are much broader and can basically be dictated by the
While you cannot purchase a home for yourself using your self-directed IRA because
of IRS rules that disallow what is called "self-dealing," another person who is not
your lineal relative or business partner can use their self-directed IRA assets to
lend you money.
RENT TO OWN
Buyers/renters pay a certain amount each month to live in the house, and at the end
of a set period -- generally within three years -- they have the option to buy the
house. Each month of rent they pay serves as income for the seller, while a
portion of it goes toward a down payment to buy the home.
Both buyers/renters and sellers need to be very clear about the contract before they
agree to this arrangement. Renting-to-own can have advantages and
disadvantages for both parties. Sellers who have already bought a new house will
benefit from the relief of paying two mortgages at once, and in a slow housing
market with many homes for sale, this may be a good option. Buyers who can't yet
afford a house may be able to get one more sooner rather than later.
The buyer pays the seller option money for the right to later purchase the property.
The lease option money could be substantial and is negotiable.
The buyer and seller may agree to a purchase price now or the buyer may agree to
pay market value at the time the option is exercised. It is negotiable.
During the term of the lease option, the buyer agrees to lease the property from the
seller for a certain rental amount.
The term of the lease option agreement is negotiable, but the common length is
generally from one year to three years.
HARD MONEY LOAN
Hard money, or private money is a non-institutional money that can be borrowed,
usually from an individual or an extremely small lending company. They are an
alternative to a bank or traditional mortgage lender, and the loans are typically
Hard money lenders can be expensive. They typically charge interest rates in the
teens, and charge at least 2-3 points and sometimes as many as 7-8. Clearly, this
is not a loan for the average Homeowner.
They typically have very short terms. This could be anywhere from a few months to a
few years, but seldom longer.
They lend at extremely low loan-to-value ratios (LTVs), meaning that they may only
lend a small fraction of the value of a property.
TO LEARN MORE…
Contact Katie Halle with Team Evolution Real Estate
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