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Just as there's more than one way to skin a cat (with all apologies to our animal-lovers), there are numerous avenues that you can use to buy a house. So if one particular method doesn't work for you, don't give up. Just keep digging, and you may be able to use one of the following techniques to help you open the door of your "dream home:"
Assumptions
Some older mortgages are assumable, meaning that the buyer can simply assume the responsibilities of paying the mortgage – these are known as non-qualifying assumable mortgages. Key benefits of this arrangement are that the buyer doesn't have the expense of obtaining a new mortgage and waiting for approval, and, if the mortgage has a reasonable or lower-than-market interest rate, can save a considerable amount of money in interest charges.
As an example, let's assume that a seller with a 7% fixed-rate mortgage has a buyer who's interested in assuming its payments. If the loan is freely assumable, the buyer can save the costs of applying for a loan and other associated costs; instead, an assumption agreement is executed between the buyer and seller. (Most assumable loans that have been originated since the 1980's are qualifying assumables; in other words, the buyer must still qualify before being allowed to assume the loan.)
The buyer assumes payment on the existing mortgage and pays the difference between the mortgage balance and the property's selling price. For instance, if the seller sold the home for $150,000 and still owed $75,000 on the mortgage, the buyer would assume the $75,000 mortgage and pay the seller $75,000. Even though the buyer isn't hindered by the expenses associated with closing a new loan, it's obvious that he or she may still have to come up with a considerable sum of cash to satisfy the seller's equity.
But be careful; there could be liability drawbacks in allowing a purchaser to assume your older loan. Someone who assumes a non-qualifying assumable mortgage is only taking on the responsibility of making the payments of the loan. If he or she defaults in this responsibility, the lender may still hold you liable for the ultimate satisfaction of the mortgage, even though you sold the property to the assuming buyer.
Balloon mortgages
A balloon mortgage is a type of financing that keeps the initial payments of the loan low for a certain period of time. The loan is amortized over a standard loan term (20 or 30 years, for instance); however, the loan doesn't run that full term. Instead, after the initial payment period has elapsed (perhaps 5, 7, or 10 years) the full remaining principal balance becomes due and payable in one lump sum.
Here's an example: a buyer secures a 7-year balloon mortgage for $115,000 at 10 percent interest. For the first seven years, the payments would be the same as that of a fixed-rate mortgage amortized over 30 years. These payments are applied almost exclusively to interest accumulation; the loan's principal is reduced somewhat, but it's fairly negligible. For instance, at the end of the seven years the buyer may owe approximately $103,000. At this time, the full remaining balance becomes due, and is known as the balloon payment (hence the loan's name). And, yes, they can pop in the buyer's face if not handled judiciously.
In most cases, the homebuyer doesn't expect to receive a windfall for the balloon payment. Instead, he or she will usually refinance, or get another loan to pay off the balloon's remaining balance. At this point, the buyer has some equity, plus a track record of making payments. Another option that the buyer might decide to use would be to sell the house at some point shortly before the balloon payment comes due.
Takebacks and second mortgages
Generally, sellers are often in a somewhat better position to secure financing than buyers are; after all, they own a home. For this reason, some sellers may be willing to provide financing for their buyers. This process is called different things depending on how the financing is arranged. For instance, the seller may procure a second mortgage to help the buyer make the down payment. Or the seller may provide all of the financing – this is known as a seller takeback or a purchase money mortgage.
In a takeback situation, the seller agrees to "take back" a mortgage for the purchase price of the home, less the down payment. The buyer, in return, agrees to make monthly payments to the seller at a certain agreed-upon interest rate. Simply speaking, the seller assumes the role of the traditional lender or bank.
Not surprisingly, this type of financing can be beneficial to both seller and buyer. The seller is able to sell his or her home fairly easily (and will likely also enjoy offers from more prospective buyers) and make a decent return on the investment. The buyer buys the home and doesn't have to cope with the many hassles and costs normally associated with securing a traditional loan. It's especially advantageous for people who otherwise might not qualify for a regular commercial loan.
In any type of agreement between buyer and seller, it's imperative for both parties to have a real estate attorney review the details. You'll want to be sure you understand all the terms and that the transaction is not weighted unfairly toward the other party (whichever one you are).
Buy-downs
A buy-down occurs when a seller or buyer pays a fee to the lender in order for the buyer to receive financing at a lower interest rate. This type of financing is often found with builders or developers. It works (with numerous variations) something like this: let's assume, for example, that you want to buy a house and the market interest rate is 7 percent, but you can't qualify for a loan at this rate. Instead, you negotiate to pay the lender 2 percent of the loan amount as an up-front fee (it would be an additional closing cost) for the agreed-upon term (two years, perhaps). During those first two years, you pay 5 percent interest on your mortgage. From Year 3 through to the retirement of the mortgage, you would pay the full 7-percent-interest payment, or you might renegotiate the loan.
Buy-downs can often be beneficial for sellers and buyers. Of course, the buyer gets the advantage of lower payments for a period of time (this can help young purchasers or those who may be borderline where their credit is concerned). Sellers, on the other hand, can benefit because if they've paid the buy-down fee for the buyer in order to facilitate the sale, they most likely will also have increase the selling price of the home to at least cover the money that was paid, and perhaps a bit more.
Land contracts
Land contracts may be appropriate for individuals who cannot secure a bank loan. In essence, a land contract works like a "layaway plan." The buyer occupies the property, makes payments to the seller, does all repairs, and generally lives in the home as if it were their own. But the home actually is not theirs until the deed is transferred. Depending upon the agreement, title to the property may be transferred either when the last payment is made or when the buyer attains a certain amount of equity. Again, with this type of transaction, it's a good idea to hire a real estate attorney to carefully review the contract before it's signed. And be aware of this major caveat: you as a land contract buyer don't hold the title to the property. If you miss a payment (yes, even one), the lender may be able to retake the property without any foreclosure procedure.
Lease options and lease purchases
A lease-option agreement is similar to a land contract. You live in the home and make the agreed-upon payments. Unlike a land contract, however, you're not obligated to buy the property. Usually, you're given the right to purchase the home at a certain price within a certain period of time. At that time, you can buy or continue to lease (but you don't buy you lose the right to purchase the property at the agreed-upon terms, unless there are provisions to extend the option period).
If you enter into one of these agreements, you need to be clear on all terms, and be sure that you know exactly who pays for what expenses. For example, if the roof is damaged, who pays – the buyer or the seller? Also, if you're the buyer, check to see whether the payments that you make (or what percentage of them) go towards the purchase price of the home. Once again, the services and advice of an experienced real estate attorney can be invaluable before signing this type of agreement, because the terms of a lease contract can vary a greatly.
Very similar to the option, you may also consider a lease purchase. In this transaction, you agree (and become obligated) to purchase the property at a given time, but you pay rent in the interim. The other lease warnings apply here, as well.
Using a co-signer
If you can't qualify for a loan by yourself, you might consider asking someone to co-sign with you. When an individual co-signs a loan, he or she also assumes responsibility for repaying it. Some lenders will allow co-signers; others will set certain restrictions. But keep in mind that the co-signer must qualify for the loan just as you do.
