What is Creative Financing for Real Estate?
Looking to fund your next real estate deal but lacking the financial prowess to do so? You don’t have to be a creative financing expert to get started.
There are many creative financing deals and options available that will have you owning a house in no time!
Have a Low Credit Score or No Liquid Cash for a Down Payment?
Creative financing, as outlined by Fortune Builders, was created in the 1970s when interest rates were as high as 18%! This high-interest rate made it very difficult for individuals and families to qualify for traditional loans.
Maybe you are looking to buy a house, or you have done the research and what to try your hand at rehabbing. Maybe you want a rental property to earn passive income. Whatever the case, there are creative financing options available to help you.
Real estate is a tried-and-true way to make additional income. If you don’t have a lot of disposable income, this doesn’t mean you can’t own an investment property. You just need to be creative and think outside the traditional loan structure. The following creative financing opportunities are uncommon ways that a person can use to buy property.
Rent To Own
Renting to own is also known as a lease option to buy.
In this situation, a buyer lives in the property and pays rent until they can purchase the home. The rental period typically lasts around 1 – 3 years in most cases. This gives renters time to build up credit or to save up for a down payment. Some sellers will ask for an upfront fee, or option money, as a good faith payment that the renter is serious about owning. This can be 2.5 to 7% of the purchase price according to Fortune Builders. If the renter/buyer decides they do not want to buy the property after the rental period ends, they will lose this upfront fee.
It is also common for a portion of your rent payments to be put towards the home purchase. This will also help incentivize the renter to buy the property after the rental period expires.
When using seller financing, you do not have to work with a third-party lender. Instead, the seller becomes your lender. You and the homeowner work together to decide how payments will be made and determine the interest rate. Your mortgage payments will go directly to the seller.
Sellers offer this type of financing when they do not have another option, but they must sell their homes immediately. This might happen when they cannot afford the cost of repairs or the current taxes on the property are too high. This is an ideal situation for someone who doesn’t qualify for a loan now but would in a few years. This is easiest when the seller owns their house outright, otherwise, they will have to pay their loan off immediately.
R.E. Tipster explains hard money as an expensive and short-term solution for buyers. Someone looking to purchase a home can obtain money from another individual or business who is looking to invest in real estate. Often these terms are more lenient than traditional loans. Certain individuals or businesses may not require a credit check or verification of income. You can potentially receive money quickly this way, however, term lengths may be shorter than regular loans and the interest rates will most likely be much higher.
This creative financing structure is like hard money except that it typically involves friends and family lending money to the buyer. The nature of these personal money loans can be more flexible since there is already a relationship established between the lender and borrower. Friends and family may also have enough disposable income to lend you money without charging any interest, or at a much lower rate than through a hard money loan. Owing money to friends and family can put a strain on your relationships so should only be entered into carefully.
Crowdfunding is a new phenomenon that allows investors to use money from the public. There are well-established platforms that authorize users to ask for money. Then, random strangers, friends and family, and other people in your social networks can work together to make contributions towards your house-buying goals.
Real Estate Financing Loans
Have a funded retirement account? According to U.S. News, you can borrow up to $10,000 from our IRA to purchase your first home, or you can borrow up to $50,000 from your 401(k). There are restrictions and penalties to using IRA loans, so research these fees ahead of time. Then you’ll know what to expect and whether or not this loan will be beneficial for your home buying experience.
Federal Housing Administration backs loans for buyers who don’t qualify for traditional loans. You will be able to pay a lower percentage for a down payment. However, this means you will have to pay for mortgage insurance until you have paid off a certain percentage of your loan.
Home Equity Lines of Credit
Commonly known as HELOC, are ideal for buyers who already have equity built into a property. Many borrowers can receive up to 90% of the value of their primary residence. There are many benefits to using these loans, however, your primary residence is used as collateral, so be mindful and only select this option if you are certain that you can pay back the line of credit within the terms of the loan.
Saving Up for a Conventional Loan
Pick up extra jobs, sell belongings, and start asking loved ones for money instead of presents. Set a goal for how much cash you will need to buy the house and attack your goal with determination!
Without a large down payment or high credit score, there are still many options available for you to be able to purchase a home or additional investment property using creative real estate financing techniques. You can mix and match these options and find what works best for you, allowing you to reach your goals for investing in real estate.
Learn More about the Types of Creative Financing for Real Estate at the Creative Financing Podcast – http://www.thecreativefinancingpodcast.com/
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