Creative Financing Techniques in Buying Bank and Government Foreclosures
Methods of creative financing for buying home (foreclosure or fixer upper home purchase).
Tips in getting the home mortgage loan you want
- Get 100-125 percent financing to cover foreclosure repair and improvement
- Ask seller to carry your first or second mortgage
- Ask seller to take care of your portion of closing costs
- Find relatives and friends to loan money at no or low interest. Consider sharing profits with them.
- Find partners to finance while you take care of things other than financing (finding properties, fixing them up, finding handymen, contractors, etc.).
- Credit card financing may be good for fixing up costs.
- Equity line of credit is good for down payment and also for fixing up expenses. Interest on these loans is tax-deductible.
- If you are over 59 years of age consider using your pension funds (401k and IRA). You pay no penalty if you follow the rules. You may withdraw your funds under certain circumstances. Again, check with your accountant.
- You may use the cash value of your life insurance by keeping your current coverage.
- Get a car loan or sell your fully paid, or expensive car to buy a lower-priced car to get some additional cash. Remember: Monthly car installments work against you in obtaining mortgage loans.
- Get a construction loan.
Construction loans are not based on the purchase price but on the estimated value of the property. This is good for you because you buy fixer-upper foreclosures at below-market price, and obtain a loan based on its future selling price. In other words, construction loans cover your purchase price and your fixing up costs. For more information on home improvement financing: U.S. Department of Housing and Urban Development (HUD)
Minimize your mortgage down payment
Get 95 percent or even 100 percent financing. Consider more liberal financing even if it costs you an extra or percentage point. If you flip foreclosures, you will not feel much financial burden of home mortgage loan. Remember: you can always refinance. Refinance the property when you build up some equity. Your lender will love it!
If you are not sure whether you will be able to get financing, ask your real estate agent to include a "financing contingency" clause in your contract (offer, counter offer). If you cannot obtain financing, let's say in 15 days, your offer is no good. You are under no obligation to buy the property, no obligation of any nature.
You have two important contingencies to remember:
- Foreclosure inspection contingency
- Financing contingency
If one of them does not go through, you have the option to quit. Of course, you may buy the property if home inspection results are acceptable to you.
The seller has the following options when the inspection report indicates certain problems:
- Have them fixed. In general, banks and government agencies that own the foreclosure property are not interested in repairing the foreclosure property.
- Give credit in favor of buyer in the estimated amount (more on estimating foreclosure repair costs). HUD gives you allowance to cover your repair expenses when you buy HUD foreclosures.
- Reduce price to accommodate repairs. Again, HUD does this.
- Do nothing and cancel contract.
Buy real estate property with no cash! Zero down!
There are lots of books on this. Is this possible? Yes, it is. You need to develop some negotiation skills to do it. Keep in mind that most "Zero Down" books and seminars advise you to use OPM (Other People's Money) to full extent. This may be used as leverage and a profitable way to go. However, you carry a lot of risks due to your over exposure as well. Under good and stable economic conditions, it works fine.
Here are some hints: First, spend some time to determine your borrowing strategy. Lenders used to finance only 80 percent of the appraised value in the past. Now, you can get 125 percent financing from sub-prime lenders.
Seller/lender financing: Most buyers don't even bother, but you should!
When you are buying: Ask the seller/lender from the very beginning whether they would consider taking a second mortgage on the property with a market-related interest rate. Lender will be willing to work with you as your credit rating is much better than the owner who was not able to pay his/her monthly mortgage payments.
Advantages: When you succeed in getting lender/bank financing, you don't need to go to a lending institution to qualify. When you go to a financing institution for the portion of the price that is not financed by the seller the lender will love to do business with you. Your seller can avoid "due on sale" activation on the part of its lender since he/she still maintains borrower status.
Seller financing is great if you have no credit or poor credit. Your seller takes the risk. You may consider an interest rate slightly higher than the market interest rate to take advantage of this kind of financing.
When you are selling: Consider seller financing when you are selling your property if you can afford it. You get a wraparound mortgage, and your buyer pays installments to you. A wraparound loan is good for you when there is a prepayment penalty or the interest rate on your present loan is low. It is attractive for your potential buyers who want to have seller financing.
- Your buyer does not have to qualify.
- You are entitled to ask for a price higher than market price.
- You can charge an interest rate higher than market interest rate.
- Your lender cannot claim "due on sale" because you are not changing your loan agreement.
- You can increase your income while tying up some portion of your money. It's great if you can afford it.
Advantages of seller financing:
- It is faster. As soon as seller agrees, the deal is done.
- No qualification: Buyer does not need to be qualified.
- Lower risk: Seller holds the title until installments are paid.
- No down payment.
- Tax advantage: (1) Seller pays taxes on installments he/she receives each year, not based on the selling price. (2) If you cannot qualify for capital gains tax exemption ($500,000 for couples, $250,000 for singles) in the year you sell your property, then, you can provide seller financing and conclude the sale in a later year when you qualify for the exemption.
- Interest rate benefit: Try to get a lower interest rate when you are buying. Try to do the opposite when you are selling. Unrealistically low interest rates may not be acceptable to the IRS.
Seller financing is secured by a promissory note. This note contains loan amount, interest rate, installment due dates, maturity date, late payment fee, in addition to issue date and other information.
Lender financing: Common interests
Lenders that own REO properties are highly motivated to sell properties in their portfolio. They may consider suitable loans to make the sale easier. You may negotiate anything: price of the property, down payment, interest rate, and other terms of the loan. You may even get a loan for repairs. Test your creative financing ideas freely!