Let’s face it – financing a home purchase is no easy feat! Since most people cannot afford to pay for a home in cash, they must turn to a lender or bank to obtain financing in order to make the deal work. Given the current shaky political climate here in the U.S., federal regulators are changing lending guidelines and practices almost daily, making lending extremely difficult for lending institutions and borrowers alike to know what programs can be offered, to whom, and under what terms. Individuals who suffer with bad credit also face tremendous hurdles trying to obtain financing as well. No bank or lender will issue a conventional loan (20% purchase price down payment) to an individual with bad credit. Needless to say, most people in a credit bind wouldn’t have the means (on their own) to come up with 20% of a home’s purchase price.
That all said, there are plenty of ways to buy a house WITHOUT a mortgage! You just have to be creative! The strategies are as follows:
Seller financing, also known as owner carry back – In this scenario, the Seller/Owner of a house becomes the lender. You and the owner write up a real estate purchase contract that specifies that you (Buyer) will pay Seller ‘X’ amount of dollars up front. Buyer will pay Seller ‘X’ amount every month until the purchase price is paid off. The advantages of this method for both sides are:
1. Seller can ‘sell’ his or her property, collect some cash up front to move on with, and get paid a steady stream of income every month.
2. Seller can charge a reasonable interest rate (one that works for both parties), making interest income!
3. Buyer does not have to endure the harsh qualifying guidelines of the bank or mortgage lender. A private seller may be far more understanding of your situation where a bank will not.
4. Buyer gets to obtain ownership (title)., while seller holds the lien (claim) on the property until the loan is completely paid off.
Rent to Own/Contract for Deed – this is a rental agreement with an option to purchase at a later date (or at any time during the option period) for a fixed price. The advantages to this type of financing are:
1. Buyer gets to rent and take possession of the property, Owner is still retains title.
2. Owner earns monthly income.
3. Buyers have the advantage of time – time to improve his/her/their financial situation so that he/she/they may have an easier time qualifying for a conventional or FHA loan in order to buy out the owner.
Assume The Mortgage (If Possible) – in this scenario, a Buyer and Seller come to terms and sign the real estate purchase agreement. The buyer takes over the payments on the seller’s behalf. The buyer gets title at the close of the transaction, whereas the seller STILL has an open loan on the property, and loses title and possession to the property. For the reasons above, this type of purchase benefits the buyer more than the seller. The seller, by the very nature of this type of transaction exposes his/her credit being damaged in the event that Buyer does not perform, or pay the loan as agreed. A seller facing foreclosure or short sale may be in the position that they were going to lose their home and credit rating ANYWAY, so what does the home owner really have to lose?
What You Need to Know About Assuming a Mortgage
The Savings and Loan Crisis of the 1980s brought about federal regulatory changes that required savings and loan institutions (the major source of home loans at the time) to write off bad debt, or sell the non-performing loan to an entity that would pay pennies on the dollar for the bad debt, and collect the unpaid balance from the borrower. The federal government would insure the lenders against the losses, and allow the banks to clear the unpaid balances from their balance sheets, making that same mount of money available to be loaned out to a new consumer. Enter for the first time the ‘due on sale’ clause.
The ‘Due on Sale’ Clause – is language contained in the mortgage paperwork that allows a lender to call a loan balance due and immediately payable upon the sale of real property. This provision was designed to prevent the sale and transfer of real property without the mortgage being paid off. While most mortgages written after the mid-1980s (and all VA mortgages) contain said clause, there exists one AWESOME loophole, which is buying ‘subject to’.
Buy Houses ‘SUBJECT TO’ (one of my favorite, and most creative methods) – When buying real property ‘subject to’, it means subject to the existing financing (and all liens of record, like mechanic liens, recorded judgments, easements, clouds of title, etc.). This method allows the seller to sell the property to the buyer without triggering a due on sale clause, but comes with a few caveats. See the example below:
1. Seller creates a real estate trust as a holding entity for title to the property, and adds Seller and Buyer as beneficiaries (in a Deed of Trust state, just add the buyer’s name to the deed)
2. Seller opens an extended escrow account. An escrow account is a third, impartial party that holds and distributes funds per the instructions given to it by the parties of the transaction. An extended escrow account remains open for several years. In this case, it’s the beneficiaries of the trust created in #1. Buyer funds escrow account and pays monthly mortgage payments equal to what is required by the existing mortgage.
3. Escrow then pays the funds deposited from buyer to the mortgage company on the due date.
4. The real estate trust/deed of trust remains in effect until the entire mortgage has been paid off.
5. When total balance is paid off, Seller removes his/her name from real estate trust or deed of trust.
It is very important to check with your attorney about drafting this type of contract. The language must clearly state each parties’ objectives, give instructions for the escrow company, and hold each party accountable to fulfill their obligations throughout the entire process. Buying ‘subject to’ is one of the BEST methods of getting your hands on a property at an affordable price WITHOUT qualifying with your own credit! It is also a GREAT way to get real estate without having to save ridiculous amounts of money!
I sure hope this article helps you in your real estate endeavors. Where there is a will, there is a way! Please visit my other website http://strategic-investors.com/. The site hosts my e-book “Get that real estate for pocket change!”. My e-book explains how to buy real estate for only a few thousand dollars (or less) in ALL 50 states. In most counties and states, you will have the ability to point and click to see sale dates, current inventory, and SO MUCH MORE!
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