Home ownership is still a powerful draw for millions of Americans despite a protracted housing downturn that has sent home values plunging and has resulted in an increased number of foreclosures across the country. Savvy home buyers are jumping into the market, negotiating the best deals and coming away with bargains in the process.
Finding a home is one matter, but financing is another issue. Without a mortgage agreement in hand, you won’t be able to buy a home unless you have enough cash to avoid financing. Today’s home buyers have several options available to them as they finance the purchase of a new home. Let’s take a look at four options that you may want to consider.
Traditional financing – Most home loans written are for 30 years and offer a fixed rate. Many people choose an adjustable rate mortgage as this option comes in with a lower interest rate initially before adjusting later on.
An ARM offers lower monthly payments at first, but it has the potential of costing you more in the long run if interest rates climb. If you plan to stay in your home for many years, a fixed rate mortgage will do. Choose an ARM if you plan to stay in your home for only a few years.
Seller financing – If you’re having difficulty obtaining a mortgage due to tight lending, then one option is to ask the seller to hold the mortgage himself. Under this arrangement, you’ll make your mortgage payments to to the seller instead of to a bank. If you default on the loan, then the seller can foreclose and take the house back.
In a good housing market, selling financing is relatively unknown, as buyers obtain mortgages on their own. In a tough market where few buyers are available, a seller may entertain financing to a buyer if there are no other qualified buyers available. Not sure whether the seller is interested in holding the note? Just ask him — he may say no or ask for some time to consider your offer.
Assume a mortgage – In some instances, you may be able to assume a current mortgage from a seller. Under this arrangement, you take over payments for an existing mortgage and are now the buyer of record for the home.
Assuming a mortgage requires you to receive approval from the lender. If the seller is behind on payments, you may need to catch up on payments too. The lender will run a credit check on you to confirm that you have the ability to handle mortgage payments. Another advantage here is that some of the closing costs you would have faced had you applied for a mortgage yourself will not be charged.
Lease purchase a home – If you’re not qualified for a mortgage, but you want the home, the seller may agree to rent your home until you have enough money to buy it. Under a lease-purchase agreement, the seller may rent you the home for two or three years and then at the end of the lease term allow you to exercise your option to buy the home. That sale price is determined before you exercise that option and you’re given time to “try” the home first before deciding whether to buy it later.
A sample lease-purchase agreement can look like this: the home has a rental value of $1,200 per month. The seller charges you $1,500 per month with $300 set aside toward your down payment. With a two-year lease you’ll have $7,200 credited toward your down payment. Thus, if the home is sold to you for $150,000, you have $7,200 in down payment and can seek a mortgage for the difference.
Under this arrangement if you can get a mortgage, then the house is yours for the agreed upon price. However, if you walk away from the home, then the homeowner keeps the set aside amount. In this example you would lose $7,200. Only consider this option if you absolutely want the home and you know that your financial picture will improve enough to allow you to obtain a mortgage.
Considerations
You can save money on a mortgage by opting for a shorter term too. Home buyers with the means to put a significant amount of money down on a home may find that they can afford a 15-year mortgage. The shorter terms will save you tens of thousands of dollars in interest payments and give you clear title to the home in half the time.
Rick Alvarez writes for CommonGround. CommonGround is dedicated to providing exceptional online environmental courses for environmental consultants and those interested in becoming an environmental consultant.
