Is it possible to finance a home when the banks say no? The American Dream used to be home ownership, apple pie, little league, education – it has been evolving for as long as it’s been around but a hallmark of North America is certainly still home ownership.
Getting a loan on a home even if you have ready cash has become more of a challenge, however. It can be frustrating to look around at all the empty houses and think that many more households now are multi-generational, but it can also lead to innovation.
So how does one finance a home when the banks say no? If your credit is not in shape to buy but you have some cash – or even if you don’t – here are some strategies you can use to not just occupy a home as a tenant, but become the legally-titled owner.
Creative Financing History
As a little background, there used to be such a thing as an assumable, non-qualifying loan, where all a seller had to do was sign over their mortgage to you. Banks quickly regretted them and started adding a due-on-sale clause to all new mortgages. This means if you transfer legal title to someone without the bank’s permission or paying off the loan, they can foreclose the loan. The question is will they?
Modern Creative Financing
None of this should be construed as financial or legal advice and you should always consult with a competent attorney before attempting any of this. Nonetheless, here are five ways to own a home without stepping inside of a bank, ranked from worst to best.
1. Partnerships, 1 out of 5 Stars
The first law of partnerships in business, investments – in fact in everything except marriage – is “don’t!” Partnerships rank low in our findings here because simply, so much can go wrong. In the past if you were turned down for a loan on a car or home or anything for that matter, you could go to your rich parents or relatives and have them co-sign.
Almost as fast as borrowers come up with creative ways like this to squeak into a loan, banks eliminate them. And co-signing is practically a thing of the past.
However, you can always purchase a home through a bank in conjunction with other people. There is some difference between being co-buyers and having a co-signor. If you have a creditworthy person who is willing to help and be part owner, or can find someone to do this as a business venture, you can expect to get through the buying process in a similar fashion as if buying on your own.
The cash you need to start may be high, assuming the other party brings their good credit to the table, or they may provide all the credit and cash if you are doing all the work. It depends.
You would be in the classic “mouse and elephant” arrangement: the elephant (they) bring the credit and maybe some or all of the cash, and you (the mouse) do all the work. The arrangements will vary depending on what each feels is fair. You might find an investor/partner like this at real estate investment club meetings (often called a “REI”), for example.
In any partnership, be very, very aware of the obligations and the recourse you each have if the arrangement goes south!
2. Adverse Possession, 1 out of 5 Stars
This is also known as “squatter’s rights,” and when you first find out about them the plan might seem preposterous, but you must consider why such laws exist in the first place.
If you find a vacant home with indications that no one has cared for it in some time and is likely not to; having no “For Sale” sign, an overgrown lawn, and boarded-up windows for example, you might be able to someday own the home without ever getting a loan.
You would – and laws vary – need to take adverse possession of the home, meaning you do not have permission to be there. You literally have to trespass, break in, and then document how you take care of the place for seven years, after which you can make a claim for the title.
At any moment, you could be charged with trespassing and removed, so this is a very rare approach but exists for a reason. When homes go vacant they become a security and a liability issue for the community as a whole. Local government misses out on tax revenue. So there’s a genuine virtue and service provided by getting homes occupied.
Look at adverse possession as the legal framework for saying you can take over an abandoned property and bring it to life which is good for everyone, and as a set of rules you must follow that protect the rights of the original owners.
3. Hard Money, 2 out of 5 Stars
“Hard money” means the terms are tough, but you traditionally don’t need to go to a bank. You might find a hard money lender directly or you might find a lender or investor through a broker. Your lender will usually be an individual who is interested in making a relatively short-term loan backed by real estate.
The loan approval will be based on the equity or profitability in the deal and not on your credit.
Typically the property will be a fixer –upper and the loan will be for one to three years, with a balloon or payoff due at the end of the term. You would find a fixer-upper property that once repaired will appraise and sell at a profit, at which time your hard-money lender will be paid off. Hard money is traditionally intended for flipping houses and large fees are usually charged, but if the investment fits, you – the mouse – should still make a profit.
Hard money is normally intended for non-owner occupants but some programs will offer to convert the loan to a longer-term with a better interest rate if you have proven yourself in the meantime by fixing and paying as agreed. You might also sell the home to yourself as an exit strategy. The lender usually makes their principal and interest back, and not interested in what you sell for over and above that.
Be very careful about the terms of hard-money loans. Remember the mortgage broker may typically work in the interests of the lender so protect yourself and be sure you can perform on the agreement.
4. Lease Purchase, 3 out of 5 Stars
A lease-purchase is simply an agreement to rent with an additional agreement to buy at a later date. (A lease-option is similar but you are not committed to purchase.)
These agreements give you the chance to move into a home that you rent for one to several years but are also ensured a chance to buy.
With lease-options or lease-purchases you may end up getting traditional financing when you buy down the road but you get to move into a home right away that you rent while feeling like an owner, as you have secured the right to purchase.
An advantage is the ease of setting up a lease-option. Most people are familiar with them, and anyone selling or offering to rent a home might be open to the idea if you ask. Compare terms, though. Some investors will ask exceptionally high down payments to start one. Part of your rent usually accumulates each month toward either your down payment or the purchase price, but if you back out of the deal you forfeit those funds.
5. Subject To, 4 out of 5 Stars
This one is a bit wild but very, very interesting if you have the stomach for it. Vacant properties are a minus for everyone. Getting them occupied and cared for is good for everybody. Many owners have decided to “walk away” from them for various reasons, and leave them to be foreclosed.
If you contact the owner of record they might be all too happy to sign the property over to you for a small amount of money, or for free, or some other creative arrangement. Very often they will not know there are any options available at all, and you could be a breath of fresh air to them.
Find them by checking the property address against your county Clerk of Court official records website; mail them a letter explaining your intentions; and use a quit-claim deed to transfer ownership.
This type of purchase is called “subject to” as in you’re buying the home subject to or under the terms of the original lender and mortgage. By transferring title without paying off the loan, the bank will have a right to foreclose. That is the risk you must be aware of. Your bet, though, will be that the bank will prefer to see the payments made once again and go along with your plan.
You will be on the title and the person who deeded the property to you will remain on the mortgage. The benefit to the seller is they avoid actually going through a foreclosure sale (they are “pre-foreclosure” until the sale) and whatever other accommodations you make for them.
Once you are the legal owner you must now deal with the mortgage company. The most direct route to getting a foreclosure suit dropped and the lender happy might be to ask the arrears be added to the back of the loan and start making the regular mortgage payments, if they are manageable.
With a good bit of research and caution this option, believe it or not, tops our unconventional list! It is most likely the one to require the least cash, albeit the most creativity.
This article is a primer, intended to give you ideas to explore, and by no means a complete guide to these approaches.
The number of vacant homes as one drives around can make it seem like all is lost and zombies are coming! But that’s just not the case. Every vacant house is fertile soil for a sound investment. Even conventionally-offered homes can be acquired creatively.
The term creative financing has been put in a closet for some time now but it surfaces cyclically. When conventional mortgages are hard to get people get creative. When conventional funding is easy – as it had been through the bubble – creative finance options and even the vernacular disappear almost everywhere except investor club meetings.
Well, it’s back! It serves a purpose.
As espoused in The Art of War – and I’m paraphrasing here – leaving something intact is senior to leaving it in ruins. It’s humane. Geared with creativity and an open mind, proceeding carefully, and seeking professional advice where needed, you can start acquiring real estate to live in or as investments, without getting bank loans. And the homes are all around you!