Alternative
Bad Credit Financing Sources To
Institutional
Lenders...
Real estate financing
must take an
alternative path
when
institutional
lenders, such as
those described
earlier, will not
loan on a property,
or the buyers face
bad credit issues.
Lets briefly
review some of the
more commonly
available
alternatives to
institutional
lenders.
Purchase Money
Mortgage
A purchase money
mortgage is when a
seller is willing to
accept part of the
purchase price owed
him/her in the form
of the buyer's
promissory note
accompanied by a
mortgage of deed of
trust, it is also
called purchase
money deed of trust.
This allows the
buyer to substitute
a promissory note
for cash and the
seller is said to be
"taking back
paper."
Purchase money
financing is popular
for land sales
(where lenders
rarely loan), on
property where an
existing mortgage is
being assumed by the
buyer, and on
property where the
seller prefers to
receive his money
spread out over a
period of time, with
interest, instead of
lump-sum cash. For
example, a retired
couple moves out of
a large home into a
smaller one. The
large home is worth
$120,000, and they
owe $20,000. If they
need only $60,000 to
make their move,
they might be more
that happy to take
$60,000 down, let
the buyer assume the
existing mortgage
and accept the
remaining $40,000 as
$400 per month
payments at current
interest rates.
Alternatively, the
buyer and seller can
agree to structure
the $40,000 as a VRM,
RRM, ARM, GPM,
partially amortized
loan or
interest-only term
loan.
If the seller
receives the sales
price spread out
over two or more
years, the seller
can use the
installment
reporting method for
calculating income
taxes. Being able to
spread out the taxes
on a gain is a major
incentive to use
seller financing,
especially for
investment property.
The seller should
be aware, however,
that he may not be
able to convert his
"paper" to
cash without a long
wait or without
having to sell it at
a substantial
discount to an
investor.
Additionally, the
seller is
responsible for
servicing the loan
and is subject to
losses due to
default and
foreclosure.
Nonetheless, in a
tight money market a
purchase money
mortgage, or one of
the real estate financing
alternatives
discussed next, may
be the only way he
will be able to
sell.
Real
Estate Financing
Alternatives To
Wraparound
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