Mortgage Alternatives

Posted by: Tim Ryan on April 15th, 2011

There is no better time to purchase real estate than in today’s economy as prices have evened out, and the inventory proves that it is indeed a buyer’s market. There are many options in which to purchase a real estate investment, whether it is cash or through the traditional methods of conventional mortgage financing, but there are some instances in which homebuyers cannot obtain either. Because of the challenges due to the economy there may have been instances where individuals have suffered a bankruptcy, foreclosure, slightly blemished credit, or perhaps one has a sporadic income in which lenders raise questions about. Whatever the case, there are indeed other alternatives to obtaining a mortgage to purchase real estate for those who are ready and willing to do so.

1. One can choose to borrow from a whole life insurance policy. Whole life insurance policies are insurance policies in which the cash value accumulates over a period of time and it is possible to borrow against the cash value of the policy. One of the best features in borrowing against a whole life policy is that there is no loan qualifying process to go through. It is important to keep in mind though that by borrowing against a whole life policy it does diminish the face value of the policy. If this is an option, it is important to ask the insurance carrier of the whole life policy several questions such as: is there an interest rate on this loan, is the amount I withdraw taxable, could my policy lapse because of this withdrawal, can I pay back the loan to bring back up the original face value that the policy once had? Be smart and realistic. Ask if the negatives outweigh the positives when thinking of borrowing against a whole life policy.

2. Another option is owner financing. This is where one does not obtain a mortgage through a bank, but makes monthly payments directly to the seller of the property. A contract or an agreement between the buyer and seller would be drawn up outlining the terms of the loan, purchase price, and interest rate. Benefits of seller financing are less stringent loan requirements, no origination fees or points, no extensive mortgage criteria, and fast closings. The downside is that one can expect to pay a higher interest rate when purchasing a property that is seller financed. If this option is to be considered, it is wise for a buyer to seek out the advice of a seasoned real estate professional as it is possible for some challenges to arise; for example, a seller might not own the property free and clear.

3. Rent to own or a lease option, is another alternative to conventional mortgage financing. This allows a homebuyer to rent a property for a specified amount of time with the option to buy the property at the end of that specified period. Monthly rental payments generally are applied to the down payment. However in the event the buyer decides not to purchase the property, they can lose the rent that was to go towards the down payment for the purchase of the property. Renting to own can be a good option for those individuals who are not in a position to purchase a property but will be in a better position within three years or so.
In addition to the issues listed above, those looking to purchase property by using any of the options listed above must realize that there can be potential problems in doing so. Alternative financing methods could affect retirement plans or can cost the homebuyer more because of higher interest rates. If planning on using an alternative to obtaining a conventional mortgage, it is imperative to discuss these options and the impact they may have with a title company, real estate attorney, or tax professional. It is also wise to seek the advice as well from a financial advisor before proceeding with any of the above.

Finally, alternatives to conventional mortgages are options that can be helpful for those who have been denied by mortgage lenders. If one has been turned down by a mortgage lender because of bad credit, or not enough income, then perhaps now is not the right time to purchase a property, so it is important to ask questions and be honest with oneself before making the important decision of purchasing real estate.



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