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Creative Ways to Finance Real Estate
For the majority of home buyers, the traditional path to mortgage financing is the one to follow. This means that you save between the 5 percent common minimum down payment to the 20 percent down payment that conventional lenders require, keep a credit score that is high enough to keep the banks happy, and a verifiable record of income that shows you have the means to keep up your mortgage payments in a reliable manner. However, many people who have the means to afford the payments on a mortgage don’t have the verifiable income record or the credit score that banks want. In situations like that, a little creativity can make all the difference. Amansad Financial has helped hundreds of people find the funding for the properties they want, either for their own home or an investment property. Take a look at some of the most common solutions that have worked for our clients.
Alternative Financing Home Purchase Seller Carry Back Financing
Looking for Creative Ways to Finance Real Estate? Whether you are a first time homebuyer or an investor, there are times when Creative Financing Home Purchase methods are necessary. In a “seller carry back” situation, the owner is willing to carry the loan for your purchase. This is most common when a seller has a property free and clear without any existing liens. The seller no longer wants the property and is willing to exchange it for a monthly payment. However, the time constraint on one of these loans is shorter than a long term mortgage, generally between one and five years. If you’re the home buyer, that’s the amount of time you have to either pay the whole note yourself or find alternate financing. by that time, you may have brought your financials in line with bank requirements. If not, you will need to find another financing source, but in the meantime, you will be building up equity as you clean up your financial picture.
Mortgage Assumption Financing
If the rate on a seller’s mortgage is significantly low the current market interest rate, assuming that mortgage can be a great way to buy a home and save a lot of money. This assumption is valuable to both the buyer and seller, for obvious reasons. Many lenders are unwilling to permit an assumption at the original rate if market rates are significantly higher, though, because they want to make money at the market rate. If the lender is willing to go along with this, though, the buyer will generally have to pay a bit above market because the seller needs to profit from the transaction as well. If the seller’s mortgage does not have a “due on sale” clause, this can be a workable way to help both parties benefit.
Seller Second Financing
This is one of the most commonly used creative financing methods. Basically, this term means that a second mortgage comes from the seller, and it generally is large enough to cover the down payment that the bank requires. If you are pre-qualified for a loan requiring a down payment of 20 percent, make an offer that is contingent with the seller agreeing to carry a note for 20 percent of the purchase price. This allows you to get into the property without having to put any of your own money into the deal. The seller gets to keep the vast majority of his equity and gets out of the house. It is important to make sure that your first lender will allow a second mortgage to be attached to it before assuming that this will work.
Amansad Financial has connections with many investors who are looking to put their money in the real estate market as private lenders. Basically, they are willing to put up to 70 percent of a property’s LTV into the purchase, so if you have a down payment of 25 or 30 percent, you can get a private lender to work with you. The term of a private loan is generally three years or less, but this still gives you (as the buyer) the time to clean up your credit and get traditional financing in place before the private loan term runs out.
Mortgage Financing Options Available
When we meet most of our clients looking for a Financing Mortgage Option, they all believe that there is only one way to finance a mortgage. You go to the bank with a big down payment, wait for them to pore over your credit history and look at your pay stubs, and then either begrudgingly decide to approve your mortgage or decide that you’re not quite worth the credit risk. Because many Canadians connect home ownership with success as an independent adult, this is an encounter that causes quite a bit of stress and consternation, particularly for people whose finances are not at their very best. Luckily alternative Mortgage Financing options exisit
Creative Mortgage Financing Options
What’s closer to the truth is that there are different kinds of mortgages for different kinds of borrowers. For people who roll in with a high credit score and an ironclad employment history, the banks are willing to approve conventional loans in many cases, as long as they can put 20 percent of the purchase price down. People with those stellar criteria in place but who do not quite have 20 percent saved up to put down, the banks will issue a “high-ratio” loan as long as the borrower can put 5 percent down. However, this gets more expensive for the borrower, as he has to pay mortgage insurance along with the principal and interest.
But what about people whose credit scores aren’t quite as rosy? There are the “Alt-A” lenders. These financing sources charge more interest than the banks do for their “A” loans, because the borrowers represent a slightly greater degree of risk. It is still possible to get loans from these lenders if you fit within their parameters for credit score and income history, but if you don’t quite make it in with these lenders, there is also the “B” group. From “A” to “Alt-A” to “B,” the different letters refer to a sliding scale of creditworthiness, and many borrowers find a place somewhere on that spectrum. The interest rates for “Alt-A” and “B” loans will fall between the “A” rates and the Canadian Benchmark Rate. Amansad Financial has connected many clients with one of the lenders in these groups.
Not everyone who wants a mortgage can fit in one of these categories. To be fair, some people aren’t quite ready for a mortgage. They haven’t saved enough for a down payment, and they don’t have enough in personal savings to pay for monthly expenses in case of a layoff or other catastrophe — and to avoid foreclosure in a financial emergency.
However, there are some people who can’t get approval from the “A,” “Alt-A,” or “B” groups of lenders, even though they can handle a mortgage in their current financial situations. A lot of the time, the issue boils down to income history verification. Many people who have started their own businesses and are doing quite well still can’t provide the sort of third-party verification of income that the banks like to see. Other people have changed jobs a couple of times in the past year and, while they have maintained a stable level of income during that time, the short duration of each position still gives the banks a bit of pause.
At other times, the issue has to do with credit score. Some people have gone through difficulties in the past few years, such as a layoff or a lengthy medical illness, and were unable to work. As a result, they went for a period of months without keeping current with their financial obligations, and their credit scores have suffered. However, in the time since then, they have improved their financial situation and saved up a significant amount of money to put down on a house, while also bringing those prior obligations current. Their credit scores, though, have not risen quickly enough to make the banks happy, and so they still can’t get a mortgage.
Even so, many of these clients have the means to put down between 15 and 30 percent for a home purchase, adequate savings for monthly expenses in case of a layoff, and enough income to handle mortgage payments. For clients like these, Amansad Financial offers introductions to C mortgage lenders, also known as private lenders — companies and individuals that want to invest in the real estate market by serving as the lender for a mortgage. They stand to gain interest rates between 2 and 4 percent above the Canadian Benchmark rate depending on down payment and other factors, and they help people who can afford a house to begin building equity while bringing their financial profiles to the point where banks will issue them loans when the private mortgage terms expire. Amansad Financial has linked many private lenders with borrowers, helping them start on the road to home ownership.
If you are looking at making a real estate purchase and need creative financing, get in touch with one of the mortgage specialists at Amansad Financial to get the process started.