Buying Houses: Real Estate Financing Alternatives

Buying houses in today’s market is significantly different than two years ago. Declining property values have left many borrowers owing more on their home mortgage than the appraised value of their real estate. The current credit crisis has made it challenging for buyers to obtain financing. With a lack of qualified buyers many sellers are offering financing alternatives.

Popular financing options for buying houses include rent-to-own properties and seller carry back mortgages. Seller carry back financing requires the seller to act as the mortgage lender. Sellers can opt to finance all or a portion of the sale price. When sellers carry a portion of financing, buyers must be able to finance the remaining balance. This can be done by obtaining a conventional home mortgage or hard money loan.

Common seller carry back mortgages require buyers to provide a 10-percent down payment to the seller. The seller finances 10- to 20-percent of the loan while the remaining 70- to 80-percent is financed through a third party lender. However, seller carry back financing can be arranged to suit the needs of all parties involved.

Seller carry back mortgages offer benefits to both buyer and seller. The property owner retains ownership of the real estate until the buyer pays the mortgage in full or refinances the balance through a lender.

The buyer is able to purchase a home he might not have been able to finance. Seller carry back financing is a relative safe financing alternative. Loan documents should be reviewed by a real estate attorney to ensure all parties are covered in the case of default.

Lease-to-own real estate offers an alternative to renters who desire to become homeowners. Sellers rent the home to prospective buyers for two to five years. This gives buyers the opportunity to clear negative credit or establish credit and develop a consistent history of paying rent on time.

With rent-to-own agreements, a percentage of the rent money is contributed toward the purchase of the home. Most sellers require tenants to provide a down payment and sign a lease-to-own contract. When the contract expires, the tenant obtains a mortgage loan to pay off the outstanding balance.

A typical lease-to-own contract might require the buyer to provide a 10-percent down payment and apply 20-percent of the monthly rent toward the purchase price. Tenants have the option to terminate the contract; however, they will forfeit the down payment and rent monies contributed toward the purchase price.

Buyers who can obtain conventional financing might consider buying short sale properties. When mortgage lenders engage in short sales, they allow homeowners to sell the home for less than is owed on the mortgage note. The homeowner must locate a buyer within a short period of time; otherwise the lender will commence with foreclosure.

Short sale properties are generally listed below market value. Lenders engage in short sales when homeowners are facing foreclosure. Often, these homes require major repairs because homeowners were unable to properly maintain the property.

Buying houses through short sale programs can be a frustrating experience. Banks want to recoup as much of their investment as possible and are not eager to negotiate on lowering the price. Buyers should be prepared to enter into multiple counter-offers to obtain a reduced price. If lenders aren’t willing to cooperate, buyers should walk away.

These are just a few alternative finance options for buying houses. Always take time to engage in due diligence before signing contracts with sellers. If a deal sounds too good to be true, chances are it is. Take time to research the property, obtain inspections and appraisals, and check court records to make certain property taxes are paid and no liens or judgments are attached.

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