Creative financing refers to a way to own real estate outside of conventional means such as traditional mortgage loans. Traditional mortgage loans are not always the best option for every circumstance, and this is where creative financing techniques can help home buyers get in to a home. Creative financing can help people with less than perfect credit own a home.
Creative financing techniques are also commonly used by investors in order to gain control of properties with the least possible out of pocket expense.
As the name suggests, there are numerous options for creative financing. Before you choose to use any method of creative financing, it is best if you research all of your options and become familiar with how it all works.
Here are several common methods of creative financing that are used…
Rent to Own / Seller Financed Mortgage
In a rent to own situation or a seller financed mortgage, the current owner of the property holds back the mortgage on the property. Typically, in a rent to own, a portion of your monthly rent goes towards a future down payment. This has advantages over renting because you rent is not going to “waste” so to speak. If you decide to purchase the property at a future date, you can use the down payment portion to help you qualify for a traditional mortgage.
In the case of a seller financed mortgage, the seller acts in the same capacity as the bank and holds the mortgage on the property that you then pay back with interest. Typically, arrangements like these are more common in times when the real estate market is moving more slowly. Both sellers and buyers can benefit from such a situation as the buyer gets in to the home and the seller is able to sell the home as well as collect interest on the deal.
80/20 Home Mortgage
An 80/20 home mortgage is actually two mortgages, a primary mortgage an a second mortgage. The concept and idea of an 80/20 home mortgage is to reduce the amount of liability towards any single lender, finance 100% of the purchase price and avoid paying PMI.
You have several options that pertain to the 20% part of an 80/20 mortgage. The second mortgage can either be fixed or a line of credit. The benefit of choosing a line of credit over a fixed rate in this situation is that the interest rates can often be 2 – 5 percent lower than a fixed rate.
Government Backed Loan Programs
Some government back loan programs are also considered creative financing. There are several state and federal loan programs offered that allow for 100% financing. Closing costs can also be rolled in to the loan in some cases.
Because these programs are government subsidized, income qualifications are a common restriction of eligibility. These programs are aimed at people with mid to low income as a means of helping everyone experience home ownership.
Hard Money Lenders
Hard money lenders are traditionally used more for investment purposes than for a primary residence. A hard money lender loans money privately usually with higher interest and shorter terms compared to traditional mortgages.
While this is no means a complete run down of creative financing techniques, as you can see there are many options when it comes to financing real estate outside of traditional means.