Orange County Home Buyer Resources Creative Financing Options

For some buyers, purchasing a home with creative financing may be an alternative. Times have changed however and there are fewer sellers offering creative financing and more "catches" with these types of transactions then there were in their heyday several decades ago. Judging by the calls I receive, my impression is that creative financing is largely miss-understood. This applies especially to seller financing options, and lease-options. All of these are specialized transactions that are suitable for certain buyers and very unsuitable for many others. 

What is the first step if you would like to pursue creative financing like owner financing or a lease-option? Simple -- It is still a good idea to consult with lender. Getting a pre-qualification or pre-approval letter from a lender will be very advantageous for you when you make your offer. You should also make sure you will be qualified for financing if you are in a lease-option or other transaction where you will have to finance the purchase at some point during the transaction.  

Owner or Seller Financing

Owner or Seller Financing is a real estate term in which the owner or seller of the home finances all, or a portion of the sale. In the real estate world, this is also known as  "Owner Will Carry", "Owner May Carry", "Creative Financing" , "Seller Carry back", or similar. The seller will act as a bank and carry a private loan on the property. Occasionally, a seller may offer a property with zero down, but in most cases, the buyer will be required to put up a down payment of 10%, 20%, or more. The seller will usually change a competitive interest rate and also has the power to foreclose on the property if the buyer fails to make timely payments.

There are many variations of owner assisted finance. If the seller owns the property free and clear, he can offer the buyer a first loan, using terms and an interest rate of the owner's choosing. Typically, this will include a private trust deed. It may be a fully amortized loan, or an interest-only loan with balloon payment.

Another type of creative financing is a second loan. This is where the seller carries a second mortgage in order to help finance part of the purchase. A buyer who can qualify for only part of the purchase may be assisted by a seller who is willing to carry 10% or 20% of the purchase cost, using a private, second mortgage. You can learn more about owner financing here.

Owner or seller financing is suitable for someone who:

• Is self-employed and is having trouble documenting all of their income for conventional financing
• Is being released soon from a bankruptcy
• Has sufficient income and a reasonable down payment 

Owner or seller financing is unsuitable for someone who:

• Has no down payment
• Has poor credit
• Has insufficient income to make the monthly payments

Owner financing myths

• That the owner will finance 100% of the purchase (Very rare. Typically they will want a 10% or 20% down payment)
• That you can take over an existing loan (No! these do not exist any longer)
• That the owner will entertain financing if you have poor credit or if you cannot document your source of income (No, absolutely not!)

Lease-Options

A lease option (also known as, lease to own, rent to own, or rent to buy) is a combination of a conventional lease, a purchase agreement, and an option contract to purchase the property at a future date, usually at pre-determined price. At the end of the lease term, the tenant becomes the buyer, and the landlord becomes the seller. Lease-options are often approached as a short cut to a home purchase, which is a mistake. 

Lease-options are highly specialized transactions that can benefit a buyer if it is used in the right way. For example, an ideal situation for a lease-option would be for a buyer who has found a home they really like and wishes to purchase it, but is waiting to sell their home. This buyer has good credit and will be able to qualify for a loan when the lease term has expired. More about lease-options on my web page here. You can look for homes offering lease-options here. 

A lease-option is suitable for someone who:

• Has good credit
• Has a property they are selling and will have equity for a down payment
• Has consulted with a lender and is confident that they can qualify for financing at the end of the lease term
• Has a sufficient amount of cash for the option deposit which is typically 1 to 5% of the purchase price, and understands they may lose it if they do not exercise the option.

A lease-option is unsuitable for someone who:

• Is not sure if they qualify for a loan (has not consulted with a lender yet)
• Has poor credit
• Is uncertain whether or not they will have enough cash for a down payment at the end of the lease term

Lease-option myths

• The home owner will finance the purchase (This is almost never the case)
• The lease term can be for three years or more (Typically, the term is 12 to 18 months, maximum)
• That all of the rent applies to the purchase (Almost never. Typically only a few hundred dollars per month is offered, and this is usually only if the rent is increased to cover it!)
• That is a great for people with bad credit (No! it's a terrible idea if you have credit challenges)

Other types of creative financing

Land Contract

A land contract is a transaction in which you move into the home and make a payments equivalent to the owner's monthly mortgage payment. The owner then makes the actual payment each month and retains title (legal ownership of the home). This continues until you are able to re-finance the property in your own name, at which point, the owner transfers title and the home is yours. The typical buyer seeking a Land Contract is some with little or no down payment, or someone with very poor credit. However, this type of transaction is not recommended as it is very risky for both buyer and seller. 

A.I.T.D. (All Inclusive Trust Deed)

I still gets calls for A.I.T.Ds because this is a type of  "loan take over" that many buyers with poor credit are seeking. An all inclusive deed of trust is also known as a wrap-around loan. This means that a preexisting loan is absorbed into a fresh loan that is made by a property's seller. A.I.T.Ds are largely illegal because they violate the terms of the mortgage agreement that the home owner made with the lender. The fact is, there are no more "loan take-overs", and people with severe credit issues should strive to correct their financial issues rather than look for short cuts to home ownership. 

Congratulations on your decision to purchase your first home! If you are looking for assistance with your first home, you have come to the right place!  Please call me to arrange a consultation with my team. We can help you with all phases of your purchase, from showing you your home to referring you to financing.

Ron Denhaan - Realtor Realty One Group (949) 290-3263 ronforhomes@gmail.com DRE# 01728866