Financing Options For Purchasing Homes Foreclosed

The environment in the real estate market for buying a personal residence or  investment property is the best it has been in six or seven years. Many small investors are looking to profit from the current market in homes foreclosed, short sales and other foreclosures. Most people do not have a substantial cash reserve available, but have good credit. Other may have blemished credit and need “creative financing” options.

Whether you are buying your first home, renting properties or flipping houses, understanding the various financing options can help you make the best choice to fund your homes foreclosed and other real estate investment.

Standard real estate financing

Many individuals qualify for financing through conventional sources, such as banks, credit unions or community savings and loans institutions. With interest rates at the lowest level ever, fixed-rate mortgage of 15, 20 or 30 years are a popular choice even for home buyers and investors who are cash-heavy.

However, due to the financial crisis and mortgage problem experienced several years ago, lenders have tightened the credit criteria necessary to qualify for loans. Consequently, you should expect to make a down payment of a minimum of 10% and be able to document your income and have an acceptable debt-to-income ratio to qualify.

Lease option

The lease with option to buy works best for anyone looking for a personal residence but may not have the credit to qualify for a mortgage. It also works for investors.  You simply lease the property until you build the credit to secure financing—usually in 2-3 years.  The details of the lease with option vary, but the terms are always negotiable.

For example, you can negotiate to get the property for little or no money down. You can also work out an agreement to have a portion of the monthly lease payment applied towards the purchase of the property.

Seller financing

Often referred to as “creative financing” – meaning you use as little of your money as possible–this strategy uses Other People’s Money (OPM). In this case, the seller functions as your lender. The seller owns the property free and clear—no loans or liens on the property—and is usually motivated to get rid of the property for any number of reasons.

As a result, the seller is willing to do the following:

  • Forego the lump-sum payment he or she would normally receive by outright selling the property
  • Is willing to carry  a promissory note
  • Will accept monthly payments

Usually, the seller financing period runs is 5-7 years. Again, the terms are negotiable. Understand that you will need to refinance the home to pay off the seller. It’s much easier to qualify for refinancing.

Seller second mortgage

This is another “creative financing” technique that uses OPM. In this case, the seller takes back a second mortgage on the property that will cover most or all of the down payment for the home. Here’s how it works:

  • You prequalify for a loan but need to make a down payment of 20%
  • Make an offer for the  home contingent on the seller carrying a promissory note for 20%
  • You purchase the home without the use of your own money and the seller gets most of their equity upfront.

To make the deal work, you will need to make sure the lender will allow you to obtain financing with a second mortgage attached to the loan.

These are just a few of the strategies you can use to finance the purchase or homes foreclosed and other real estate.  In an atmosphere of tight credit, you can choose the strategy that works for your situation and purchase foreclosures or other residential real estate for personal use or for your investment portfolio.

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