Some rays of positive light are beginning to shine on the American housing industry. The US Department of Commerce has recently reported that home sales are beginning to move up
from depressing lows to a point where a full-scale recovery may soon be developing. That is wonderful news but there still are some bumps along the way. Homeowners are holding onto
their property longer and a number of buyers are stuck with serious credit problems, making it very difficult to obtain conventional mortgage loans from financial institutions. Yet, it is very possible for a prospective buyer who has poor credit ratings to purchase a house. It just means that guerrilla house buying tactics may need to be used. This isn’t as threatening as it sounds. Guerrilla house buying simply means that the road less traveled is used and strategies that are a bit unconventional are considered (this assumes that a standard home mortgage from a bank is conventional means).
Family is a potential source of financing for even the purchase itself. It is largely accepted that an increased down payment translates to more favorable mortgage terms (lower interest rates, etc). In some instances, this can make for the difference between affordable and cost-prohibitive financing. In this scenario, a buyer agrees with a family member on a loan large enough to provide a sizable down payment. In most occurrences, the terms of a family loan comprises a minimal interest rate; in others, the arrangement may consist of repayment of principle only. Utilizing a (now) larger down payment, it is possible for the buyer to arrange a path to home ownership that creatively slashes costly interest rates (and other associated expenses).
Another possibility is dealing directly with the house owner. In such arrangements, the buyer and seller agree to prescribed terms in order to eventually change ownership. In a rent to buy agreement, the renter secures an option to purchase from the landlord. A pre-set amount of monthly rent payments are allocated to the down payment. The landlord agrees, in turn, to continue assuming all maintenance costs customary to renting property. Further, the property owner agrees to sell the property to the renter at an agreed-upon price (should the renter exercises his or her option). For this period, the seller will be the holder of the lease. This is commonly labeled as “seller-financing.” In this arrangement, the buyer does not seek a conventional mortgage loan, yet assumes the mortgage payments of the seller. This means that the seller is “the bank” who continues to make required mortgage payments that are sourced from the buyer.
The above arrangements include new definitions of caveat emptor (let the buyer beware). None of these are simple handshake deals. Dealing with family members is a highly emotional situation and requires that the buyer pay immediately on any obligation. He or she might also have to persuade estate beneficiaries that an option to buy is ultimately in their best interests. Dealing with existing owners eliminates the middleman but creates other circumstances that need attention. Any rent to buy lease agreement has to be carefully studied. A buyer must be sure to avoid any unforeseen obligations. There is some risk involved in that the present owner may foreclose on his or her mortgage. That can kill the deal because the arrangement has been initially made not with the bank that owns the mortgage so the bank has no obligation to honor it. Options expire. It is entirely possible that an option to buy either from a relative or a landlord will end before the buyer can secure additional financing.
Still, the above are alternatives to the conventional home mortgage that could be explored. Naturally, a real estate professional ought to be consulted or even an attorney to make sure any terms and conditions are both legal and fair. All loose ends have to be tied and secured. A person with a poor credit rating still has a chance to buy a house but it may not be the way his or her parents did it. Using other than standard means can be employed with home ownership as the end result.
Jared Diamond is a contributor with Home Star Search, a leading online resource for rent to own homes. He can also be followed on Twitter at http://twitter.com/homestar_search. Jared enjoys writing on topics ranging from personal finance to investing.