County Home Buyer Resources
For some buyers, purchasing a
home with creative financing
may be an alternative. Times have changed however and there
are fewer sellers offering creative financing and more
"catches" with these types of transactions then
there were in their heyday several decades ago. Judging by the calls I receive,
my impression is that creative financing is largely miss-understood.
This applies especially to seller financing options, and
lease-options. All of these are specialized
transactions that are suitable for certain buyers and very unsuitable
for many others.
What is the first step if you would like to pursue
creative financing like owner financing or a lease-option?
Simple -- It is still a good idea to consult with lender.
Getting a pre-qualification or pre-approval letter from a
lender will be very advantageous for you when you make your
offer. You should also make sure you will be qualified for
financing if you are in a lease-option or other transaction
where you will have to finance the purchase at some point
during the transaction.
or Seller Financing is a real estate term in which the owner
or seller of the home finances all, or a portion of the sale.
In the real estate world, this is also known as
"Owner Will Carry", "Owner May Carry",
"Creative Financing" , "Seller Carry
back", or similar. The seller will act as a bank and
carry a private loan on the property. Occasionally, a seller
may offer a property with zero down, but in most cases, the
buyer will be required to put up a down payment of 10%, 20%,
or more. The seller will usually change a competitive interest
rate and also has the power to foreclose on the property if
the buyer fails to make timely payments.
are many variations of owner assisted finance. If the seller
owns the property free and clear, he can offer the buyer a first loan, using terms and an interest rate of the
owner's choosing. Typically, this will include a private trust
deed. It may be a fully amortized loan, or an interest-only
loan with balloon payment.
type of creative financing is a second loan.
This is where the seller carries a second mortgage in order to
help finance part of the purchase. A buyer who can qualify for
only part of the purchase may be assisted by a seller who is
willing to carry 10% or 20% of the purchase cost, using a
private, second mortgage. You can learn more about owner financing here.
Owner or seller financing is suitable for someone who:
- Is self-employed and is having
trouble documenting all of their income for conventional financing
- Is being released soon from a
- Has sufficient income and a
reasonable down payment
Owner or seller financing is unsuitable for someone who:
- Has no down payment
- Has poor credit
- Has insufficient income to make the
Owner financing myths
- That the owner will finance
100% of the purchase (Very rare. Typically they will want a
10% or 20% down payment)
- That you can take over an
existing loan (No! these do not exist any longer)
- That the owner will entertain
financing if you have poor credit or if you cannot document
your source of income (No, absolutely not!)
option (also known as, lease to own, rent to own, or
rent to buy) is a combination of a conventional lease, a purchase agreement, and an option
contract to purchase the property at a future date,
usually at pre-determined price. At the end of the lease term,
the tenant becomes the buyer, and
the landlord becomes the seller. Lease-options
are often approached as a short cut to a home purchase, which
is a mistake.
Lease-options are highly specialized
transactions that can benefit a buyer if it is used in the
right way. For example, an ideal situation for a lease-option
would be for a buyer who has found a home they really like and
wishes to purchase it, but is waiting to sell their home. This
buyer has good credit and will be able to qualify for a loan
when the lease term has expired. More about lease-options on
my web page here.
You can look for homes offering lease-options here.
A lease-option is suitable for someone who:
- Has good credit
- Has a property they are selling
and will have equity for a down payment
- Has consulted with a lender and
is confident that they can qualify for financing at the end of
the lease term
- Has a sufficient amount of cash
for the option deposit which is typically 1 to 5% of the
purchase price, and understands they may lose it if they do
not exercise the option.
A lease-option is unsuitable for someone who:
- Is not sure if they qualify for
a loan (has not consulted with a lender yet)
- Has poor credit
- Is uncertain whether or not
they will have enough cash for a down payment at the end of
the lease term
- The home owner will
finance the purchase (This is almost never the case)
- The lease term can be
for three years or more (Typically, the term is 12 to 18
- That all of the rent applies
to the purchase (Almost never. Typically only a few
hundred dollars per month is offered, and this is usually
only if the rent is increased to cover it!)
- That is a great for people
with bad credit (No! it's a terrible idea if you have
types of creative financing
A land contract is a
transaction in which you move into the home and make a
payments equivalent to the owner's monthly mortgage payment.
The owner then makes the actual payment each month and retains
title (legal ownership of the home). This continues until you
are able to re-finance the property in your own name, at which
point, the owner transfers title and the home is yours. The
typical buyer seeking a Land Contract is some with little or
no down payment, or someone with very poor credit. However,
this type of transaction is not recommended as
it is very risky for both buyer and seller.
A.I.T.D. (All Inclusive Trust Deed)
I still gets calls for A.I.T.Ds
because this is a type of "loan take over"
that many buyers with poor credit are seeking. An all
inclusive deed of trust is also known as a wrap-around loan.
This means that a preexisting loan is absorbed into a fresh
loan that is made by a property's seller. A.I.T.Ds are
largely illegal because they violate the terms
of the mortgage agreement that the home owner made with the
lender. The fact is, there are no more "loan
take-overs", and people with severe credit issues should
strive to correct their financial issues rather than look for
short cuts to home ownership.
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