Financing – Alternatives

Can’t or don’t want to obtain a traditional mortgage? Not in ideal financial health because of prior foreclosure or bankruptcy or other credit issues? Have assets but cannot demonstrate sufficient or consistent income to qualify for a mortgage? (Many small business owners fall into this category). There are often other non-traditional or non-conventional options available to you.

#1 Borrow Money from a Whole-Life Insurance Policy

A typical Whole Life Insurance Policy investment accumulates an ever-growing cash value over time and it is often possible to borrow against this cash value without having to qualify.

However, you should diligently look into several factors: insurance company’s interest rate and other terms and conditions, prepayment policies, tax implications, and the implications towards the death and/or other financial benefits of the policy.

#2 Borrow Money from the Seller

With the challenging market it is more difficult to find sellers with the equity to assist with seller-financing, but if you do this can provide a very attractive means of buying a home – or to assist in it.

As with and standard mortgage, the seller will want his debt protected by a promissory note and deed of trust (mortgage) in the form of a formal agreement which will define the terms and conditions – principal amount, interest rate, repayment schedule, and consequences for default.

A seller can only offer first mortgage financing if he has free and clear title or he can possibly provide some second mortgage financing if he has sufficient equity to do so – if he does have a mortgage on the property it will have to be paid off through the transaction.

Sellers are usually only amenable to this if they are otherwise having trouble selling their property due to a weak market or if they cannot sell for the full amount they’re seeking – so be cautious that you factor in the possibility that you may pay more for the property itself to induce the seller to assist with the financing.

It is not an easy or simple thing for a seller to become a lender. Not only does he forego receiving the cash from the home right away, he has to set up and arrange a system for collecting payments an calculating remaining interest, and possibly even undertaking collection activity –these are other reasons that seller-financing can cost you more. Even if he was to turn around and sell your mortgage to an investor he needs a buffer in the rate of the loan to make this worthwhile.

The buyer ostensibly benefits by getting into the market if he otherwise wasn’t able to, and without a formal qualifying process or loan and origination fees. Also, the buyer can negotiate to tailor the terms and conditions to his own needs instead of having to follow a cookie-cutter standard. He just has to talk the seller into it and present himself as a worthwhile borrowing candidate. Escrow companies can supply the needed documents.

#3 Borrow from a Self-Directed IRA

Check very carefully with the IRS on this category, but generally speaking you can obtain a mortgage from a self-directed IRA owned by another party who is not a lineal relative or business partner – you cannot use your own self-directed IRA for this purpose as this is known as “self-dealing.”

The individual lending you money from their self-directed IRA can charge you interest or even take a partial equity position in the property you’re buying – this needs to be negotiated. This can be particularly ideal when you and your self-directed partner are investing in real estate to buy, hold and flip – you put up cash, they put up cash from their self-directed IRA, you take title together, when you sell you divide the profits in accordance with your agreement.

IRA owners are always looking for ways to make higher returns, and they can charge you a higher rate or a share of the profits – and have the security of a mortgage in place.

#4 Rent to Own/Lease Option

Rent-to-own or lease-option arrangements allow prospective home-buyers to lease or rent a property for a period of time that carries an option to buy the property within the period of that term. The rent price is usually established higher than market rate, and the surplus adds to a growing trust account towards the future down payment. If the buyer opts not to purchase the property, the extra rent is forfeited.

This option can be appealing to those who are not yet quite financially qualified or ready to buy but expect to be within a couple of years – allowing time to amass their down payment, restore credit issues, etc. It is also appealing when wanting to become established in a new geographic area and learn the area before committing to buy.

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Before considering ANY type of financing – whether traditional, non-traditional, conventional or non-conventional – get all of the professional legal and tax advice you need. Do not buy property that you cannot afford even if you have a willing seller or financier – in the end it is you who will pay.