How To Get Creative With Real Estate Financing

For the longest time, real estate financing was stuck at 80-20. That meant 20 percent down, 80 percent on loan. Certainly, there have been many who put more down, but 20 percent was considered the bare minimum. Happily, things have changed and there are now a dozen or more ways to finance a property purchase, whether for pure investment or primary residence. One common method is to have more than one loan, usually in the form of a second mortgage. The buyer puts 5 percent in, and effectively borrows the other 15 percent on a separate loan, usually at a much higher interest rate.

While it's nice to invest less for the same property, the downside is not limited to the higher interest rate on the second mortgage loan. Since the buyer doesn't meet the standard 20 percent minimum, lenders almost always require PMI (private mortgage insurance). And unfortunately, the fees are usually hefty. Though it's theoretically possible to have the lender remove the PMI requirement after enough payments have been made it rarely happens. In theory, once the loan(s) have been paid down so that the LTV (loan-to-value ratio) is at 80 percent — usually by a combination of paying down the second mortgage and appreciation of the value of the property — the lender will be willing to consider removing the PMI cost from monthly payments. Most often, before that happens, the loan is refinanced or the property sold.

If you are ambitious it is possible to find other resources for real estate financing. For example when you're considering property for new development, such as a planned community or new housing tract, manufacturers will often be willing to fund a home loan for early buyers. Such loans are frequently available at only 5 percent of the purchase price.

And if you're the daring type, it's possible to buy a property and then sell it, without ever owning it (at least not for long). Basically in real estate financing, it's possible that you can buy a property, establish a contract, and then sell the contract for anywhere from $500-$5,000 without ever taking possession or even being on the title. Profits are usually smaller, but obtained quicker, though deals require excellent credit.

'Sub2' deals are another form of creative real estate financing. The typical 'subject-to' deal involves having a seller deed you the property while leaving the existing mortgage in place. You never legally assume the loan, but simply start making the payments. There are lots of variations on this new way of buying property. However most of these methods are not recommended for first time real estate buyers or those who are new to the business.

Another way to do real estate financing is by forming a limited partnership. In some, each partner puts up some percentage of the cost, usually half and half, but sometimes profit is apportioned according the original percent invested. In some cases, it's possible for one partner to invest money, while the other performs the services. In this case the services could include repairs on a property that needs fixing up. The deals for a partnership will vary from people to people.

And finally, it is also possible to fund a property purchase with credit cards, but there are several obvious downsides to this method of real estate financing. Apart from the substantially higher interest rates, lenders look at all outstanding debt when judging whether to grant a loan on the remaining balance. Taking out a cash advance to cover a shortfall between the needed 5-20 percent down will usually get you turned down.

Real Estate Financing