Alternative Real Estate Financing Options
The ever changing real-estate market and the upheaval of the housing crisis are causing lenders to change their standards and guidelines on home loan mortgages. So what is a potential homebuyer to do when they have a less then perfect credit score and is trying to obtain financing?
The answer is alternative financing methods. Alternative financing is any type of loan or financing option that is not a conventional bank loan. I think everyone has become familiar with subprime loans and adjustable rate mortgages with the crisis that has been plaguing the housing market. But what many homebuyers might not know is that there are other creative financing methods they can use without having to obtain risky subprime or adjustable rate mortgages.
The alternative financing method I want to discuss is called Seller Financing. Seller financing is a loan in which the buyer assumes the seller's mortgage while the loan stays in the seller's name. In other words, the owner or seller of the home leaves their existing loan in place and the buyer simply takes over the payments, often times with extra interest payments tact on. The buyer becomes the owner of the property when the seller signs the grant bargain, sale deed, or other specific device to transfer the property. In most cases, the buyer gives the seller a down payment and then continues to pay the seller interest each month.
This growing practice and is also known as:
Seller Second Mortgage
Seller Carryback Financing
Often times, sellers can offer No Qualifying Loans to their buyers in order to make their property more attractive for sale. While selling a home with No Qualifying does reduce the stringency of traditional loans, it does not necessarily mean the buyer has bad credit. A lot of the time, lenders require two years of residency before giving out a loan. No matter what the buyer's credit status, you should get about a 10% down payment on the house. You can also raise the interest rate to add additional income to your pocket every month. The potential profits on this kind of investment can be phenomenal.
Also, let's not forget that the seller can use owner financing to his or her advantage when advertising the property. Sellers can use this to grab buyer's attention, especially in cold markets where financing is hard to come by.
And, as always with any real estate investment venture, there are risks. However, by using an adequate investment structure, you should not have any problems. Many people like to use loan servicing companies to collect buyer's payments and to disperse the funds accordingly to the ‘lenders'. By doing this, the seller will not have to worry about missed payments and their credit score being affected.
It may also a good idea to set up a trust account with the loan servicing company (usually with the money received from the down payment), just in case the buyer misses or is late with a payment, you will be covered. There are many other ways to protect yourself and reduce unnecessary risks associated with seller financing. That is why it's a good idea to go through investors with seller financing experience. For instance, Butterflylister.com is a group of investors specializing in this type of financing.
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