On the movie The Big Short, there are some humorous scenes that depict individuals (and those around them) before the Great Recession who have found ways to obtain multiple mortgages even though they clearly should not have qualified for more than one, if that. The banks even came up with the slang term “NINJA loan,” meaning “no income, no job, no assets.” In other words, people could qualify for financing and sometimes multiple mortgages with basically no money or credit.
Things are (thankfully) different now, but in some senses, they’ve swung to the other extreme. Now it can be difficult to qualify to buy a home, even if you have a solid income. And if you’re looking to take on a second mortgage, things can get particularly dicey as banks are much less interested in taking on a client with multiple loans in their name.
That said, there are some creative ways to obtain financing that avoids the traditional bank mortgage structure. This is not an exhaustive list, but here are a few options.
Hard Money Loan
A good option for house flippers and those who are looking to purchase a home that needs a lot of work done on it is a hard money loan. A typical hard money loan is:
- Short term (usually 6-12 months max)
- Amount of funding determined by a percentage of the ARV (after repair value) of the subject property
- High interest
- Interest-only payments with balloon payment of principle at the end
Let’s say you are looking to flip a house, and you estimate it will cost $100,000 to purchase, $55,000 to repair, and you will resell within 12 months for $200,000. XYZ Capital offers you the following hard money loan:
- Term: Minimum 6 months, maximum 12 months
- Amount of funding: 75% of the ARV of $200,000 (i.e., $150,000)
- 15% interest
- Payments are interest-only with a balloon payment (i.e., the $150,000 principle) at the end.
- You have to bring $5,000 down plus closing costs to purchase the home.
This could also work with a personal home purchase that needed a lot of work on it, but only if the buyer planned to refinance after doing the repairs on the home. And often it makes more sense in that situation to get a rehab loan from a traditional bank, which we discuss here. The hard money loan is usually best for someone not planning to keep the home for more than 12 months.
Lease Option
Let’s say you’re leasing a home and you decide that you want to purchase it, but you’re not quite ready or able to buy it right away. You talk to the owner about it, and he offers you a lease option for $5,000 that allows you to purchase the home for $150,000 after you’ve leased it for two years. For the next two years, you are still a tenant and the home still belongs to the landlord, but after that period, you will have an opportunity to purchase it. In the meantime, a small percentage of the rent that you pay will go towards the purchase price of the home, assuming you do purchase it. (If you don’t purchase it, you don’t get your rent money back.)
After the two years is up, you have a few possibilities.
- You can choose to purchase the home for $150,000 (minus the percent rent that has been going towards that amount), and the seller has to allow you to do so; she cannot change her mind on selling it to you since she sold you the option. At this point, you would need to obtain financing or purchase the home with cash.
- You can sell the option to someone else. This could be a good choice if you’ve changed your mind about moving there or you’ve found someone to buy the option for more than you paid for it, and you want to make a little money.
- You can walk away and choose to lose the $5,000 you put down.
There are several instances where a lease option could be attractive, such as if you’re relocating but haven’t been able to sell your home in the other location yet.
I always recommend having an attorney draft (or at least review) a contract involving an option.
Owner Financing (aka Seller Financing)
If you have bad credit or are having a hard time getting bank financing despite making a good income, owner financing could be a way for you to purchase a home. Owner financing is simple – the owner of the home agrees to sell you the home while also acting as the bank by providing you the mortgage to buy the property.
For example, if you saw a home you wanted to buy with owner financing, you would approach the owner and tell him that you would like him to finance the home to you. You and he would then decide on terms: how much down payment you would provide, what the interest rate would be, whether the interest rate would be fixed or variable, how long the loan would be for, etc. I recommend having an attorney draft the contract (and attorneys from both parties review it) so that everything is spelled out clearly and all parties get what they are looking for.
In the end, you would purchase the home just like normal, which in SC means you would go to a closing at an attorney’s office. You would then have 100% possession of the home, and, even though your loan payments would go to the former owner, he would no longer have any claim to the property (unless, of course, you foreclosed on your owner-financed loan).
At some point down the road, it may be advantageous for you to try to refinance with a bank, since owner-financing often carries a higher interest rate than traditional bank financing.