I recently attended an investment group meeting which was open to the public.  During their Question & Answer period, by far the hottest discussion topic was “What is creative financing and how does it work?” I found the answers both diverse and interesting. It seems each real estate investor conducts business a little differently.

As you know, the foreclosure market is very hot right now because more residential, as well, as commercial properties are hitting the market as lenders free up their short sale portfolios.  Since short sales help homeowners avoid a property auction and the destruction of their credit—unintended consequences of a property foreclosure—sellers are motivated to unload their properties.

Many people are very interested in buying foreclosures, short sales and REOs. However, financing the real estate deal creates considerable concern. Some investors only have a small amount of money they can or are willing to use. Others simply lack the funds required for an outright purchase. The thought of investing such a large amount of money can be intimidating. Let me try to calm your fears by demystifying creative financing.

Creative financing is not a new concept in the real estate market.  Back in the early 1980’s, when interest rates were 18%, lenders weren’t writing much in the way of mortgages. However, there were always people who wanted to buy or sell. Getting financing was a big issue.  In a way, real estate financing has gone retro. Today, we find the term creative financing frequently re-appearing in the news. The reason?  Once again, banks aren’t writing many mortgages and the real estate industry has been forced to seek creative ways of doing business.

Let’s look at some financing options.

If you can put 20% down on the purchase price of the property…

(1) No-doc or low-doc loan (scroll down to end of post for good definition). If you have a good relationship with a lender or a bank that you do business with, ask about the requirements and find out what they are willing to do in today’s market.

(2)  Look at the equity in your own home or perhaps an investment property you already own.  You could borrow against this equity for a family vacation so as not to violate any lender rules established on the first mortgage.  Don’t be afraid to ask.

(3)  Ask friends and family members who might be looking for an investment but are short on funds. Pooled together, you can proceed with a purchase.

(4)  Seller-take-back. Since the sellers wants to sell, why not be creative in involving them? Ask them to hold a note for a portion of the amount, thereby reducing the amount you need for a down payment.

(5)  Partnership. This is a widespread practice among business men who use it primarily for the tax benefits.  If you don’t belong to one, start one among your colleagues.

(6)  Credit Cards. If you stand to make enough money on the deal, paying interest on a credit card will not impact you that much.  Always be cautious and sell before the interest starts cutting into your return on investment.

(7) Hard Money Lender. These are lenders who lend money for a short period of time at a high interest rate.  Consider using this creative financing option when you already have a buyer lined up to purchase the property. You can locate hard money lenders online. Their requirements can be ascertained with a phone call.

(8)  Private Money Lenders. Let’s say for the purpose of an example scenario that the seller needs a given price for a property. You buy higher and the seller holds a mortgage or two.  The private lender advances money for the seller at an agreed upon term to you.  You pay the seller what s/he needed and then you, the investor, pay the private lender his money.  This method is used frequently in the current market to buy a fixer-upper property because it yields a large return to the investor upon resale.

These are just a few examples of creative financing options. There are other creative ways to finance.  Once you’ve used a couple of the methods I’ve suggested, you will gain confidence and new options will present themselves to you.  Talk to other real estate investors. Attend investment meetings. Call private money lenders and ask about their requirements. Determine what you need from a property to make the deal work.  Creative financing is not new to the real estate industry.  There is much information available to you from a variety of sources. Learn it and be confident. You can do this.

In my next blog, I want to talk about how to select the right property for real estate investing.

Until then…

Shirl

www.houseforeclosuresource.com

p.s. Here’s some good info on Low Doc No Doc Mortgages

Source: http://www.citytowninfo.com/mortgage-articles/specialty-mortgages/low-doc-no-doc-mortgages

As their name would imply, low doc loans and no doc loans are mortgage loans that require less than full documentation of income, employment, and assets. The name is a bit of a misnomer, because the borrower still has to fill out an application (although they actually have to fill out less of the application), and at least a credit report is pulled on the borrower. The borrower will also have an appraisal done on the property that is being purchased.

Low and no doc loans cover a broad spectrum of required documentation. Following are the more popular low and no doc mortgage programs:

• Stated income loans – A stated income loan is one in which the borrower simply has to state their income without providing any documentation of their income. This type of loan can be useful for individuals who are self employed or who have a lot of unreported cash income that cannot be documented. On a stated income loan, the borrower must still list their assets and debts and provide the backing documentation. The lender does verify employment and a credit report is pulled by the lender. A stated income loan may also be referred to as a no income verification (NIV) loan.
• Stated asset loans – A stated asset loan is one in which the borrower simply has to state their assets without providing any documentation of their assets, which are not verified. On a stated asset loan, the borrower must still provide income information with backing documentation. The lender will verify employment and pull a credit report on the borrower.
• Stated income/stated assets – This is the combination of the two previous loan programs. In this program the borrower simply states their income and assets which are not verified. Debt information is still provided by the borrower, employment is verified by the lender, and a credit report is pulled by the lender.
• No ratio loans – A no ratio loan is one in which the borrower does not provide any income information. Because of this, neither the housing ratio or the debt ratio can be calculated for the borrower. Asset information is provided by the borrower with backing documentation. The lender verifies employment and pulls a credit report on the borrower.
• No income/no asset loans – No income/no asset loans, also referred to as NINA loans, are loans that require almost no documentation. In this instance, the borrower simply fills out an application with their personal information and information about the house they are purchasing including down payment information. With these loans, the lender pulls a credit report on the borrower, obtains an appraisal on the house being purchased, and verifies the borrower’s employment.
• No doc loan – A no doc loan is one where a borrower is applying for a mortgage on the strength of their down payment and their credit. No income, employment, asset, or debt information is provided. The lender simply pulls a credit report and has the house being purchased appraised.

These types of loans represent increasing levels of risk to lenders. Because of this, there are several things that lenders do to help mitigate their risk, including:

• More stringent down payment requirements – lenders may require higher down payments of 20, 25%, or more.
• Higher credit requirements – lenders may require substantially higher credit scores than they would for full doc loans.

• Higher interest rates – lenders will charge higher interest rates than they would for a comparable full doc loan. Lenders take two things into account when determining their interest rate adjustments for low doc/no doc loans. They consider the size of the down payment, and they consider how little documentation they are receiving. As a general rule of thumb, the lower the down payment, the higher the interest rate adjustment. Also, the less documentation provided the higher the interest rate adjustment. Thus, a no doc loan with a small down payment would receive the highest interest rate adjustment. Interest rate adjustments on low doc/no doc loans can range from as little as .15 to 3.

Low doc/No doc loans are not for everyone. They serve a specific purpose. They make it easier for people whose income is difficult to verify to obtain a loan. They are also helpful to the very wealthy for whom providing the documentation would be viewed as either burdensome or intrusive.

www.houseforeclosuresource.com