With lenders tightening their restrictions on home loans, many new home buyers and sellers are turning to alternative means of financing a real estate transaction. Some of the more common forms of alternative financing will be discussed below.
This is by far the most common form of alternative financing. A lease-to-own agreement allows the buyer to assume possession of the property while the seller retains the title. The buyer will make monthly lease payments that will later be subtracted from the final purchase price. Payments will be made for a specified period. This is rarely longer than a few years. It is certainly not as long as the typical 30-year mortgage. The purchase price is also specified when the agreement is signed. If the property is not purchased in the agreed upon period, the seller retains all payments.
This is also a common form of alternative financing that applies to property for sale. In this case, the owner acts as the lender and finances the purchase of the property. If the property owner has enough equity built up in his home, he may choose to pursue this method of financing. There are primarily two means on seller financing and installment land sale contract and note and trust deed. An installment land sale contract is essentially a lease-to-own agreement. A trust deed and a note are a bit more complicated.
In a note and trust deed, the owner passes the title to the purchaser in exchange for trust deed and promissory note that provides the original owner an interest in the property. The promissory note and trust deed are no longer valid once the agreed upon amount has been paid.
The seller of the property is not required to finance the entire purchase price of the property. It is possible for him to finance only a portion of the total purchase price. The rest of the agreed upon price is financed by a traditional lending company. It is important to note that the owner financing is typically subordinate to the lender financing.
Some mortgages allow the loan to be assumed by qualified parties. While this is not typical, it does occur. When a property is sold using assumptions, the buyer takes over the seller’s payments. The buyer will of course pay the seller for any equity they might have in the property. This type of transaction is subject to lender approval, and sellers who participate in this kind of agreement should ensure that they are released from all obligations to the lender.
There are other forms of alternative financing, but these are the most common in transactions that involve single-family homes. Because these types of transactions are not typically presided over by a lending institution, it is important that buyers and sellers take steps to protect themselves. Qualified professionals, ideally by a lawyer familiar with real estate transactions, should draw up any contracts.
For most of us, buying a home is the largest transactions we will ever make. It's something we don't do every day, yet there is so much a buyer needs to know to avoid making mistakes that can cost a fortune. There are ways to avoid paying too much for your home, buying the wrong home, buying a 'dud', or missing out on the home of your dreams.