By Dian Hymer
Few buyers in this country pay all cash for a home. Most buyers make a cash down payment and finance the balance of the purchase price with one or more mortgages. In today's low interest rate environment, conventional lenders provide most of this financing. But, that hasn't always been the case.
During the early 1980's, when interest rates shot up to as high as 18 percent, most buyers couldn't qualify for mortgages. In order to complete home sales, buyers and sellers had to get creative. A seller who owned his home free and clear of any loan could offer to carry a mortgage for the buyer.
In this scenario, the seller became the bank. The seller didn't receive all his equity as cash at the time of sale. Instead, he carried a loan that was secured by a known property and he collected a monthly income until the loan was paid off. There were also tax advantages for some sellers who carried financing, which made the arrangement beneficial to both parties.
At that time, creative financing might not have been the preferred way to finance a home sale. But, in many cases, it was the only way to close a sale.
Creative financing, a term used to describe any financing arrangement that deviates from conventional financing, has a place in today's market, even though interest rates on conventional mortgages are incredibly low.
House Hunting Tip: Homeowners who are trading from one home to another should consider creative financing options if they're intent on buying a new home before selling their current home. A seller who doesn't need all of his equity in cash at the time of sale might be willing to carry financing for a buyer who needs an interim loan in order to buy before selling his current home.
For example, let's say you're trying to buy a $500,000 home. You have enough in savings for a 15 percent down payment, or $75,000. Your objective is to have a mortgage amount equal to 75 percent of the purchase price, or $375,000. So, you're $50,000 short.
Suppose the seller owns his home free and clear of any mortgages. He's trading down to a smaller home that will cost him $250,000. He doesn't have any immediate need for the other $250,000. The seller could carry a $50,000 loan for you, or even a larger loan if you want to conserve cash for emergencies.
The seller's loan would be secured against the property that you're buying, and he's selling, as a second mortgage. It would be secured behind the new first mortgage you obtain from a conventional lender.
The terms of the loan-loan amount, interest rate, due date and payment schedule are negotiable between the buyer and seller. A due on sale clause is usually included in such a loan. This clause states that the loan is to be paid off when the buyer's home sells.
In some cases, the seller may want the loan he's carrying for you to be recorded against both the property you're buying and the one you're selling. This guarantees that the seller is repaid when your old home sells.
To ease the financial burden of owning two homes, ask the seller to defer monthly payments during the term of the loan. In this case, you would pay the deferred payments in a lump sum when you repay the loan in full.
The Closing: Deferred payments will also make it easier for you to qualify for the new first mortgage on the home you're buying.
. Questions of a Do It Yourself nature should be submitted our "