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Buying a home with bad credit can be a daunting task, especially when the competition for housing is fierce.
There is an option that can help narrow the gap. This means completely abandoning the bank or supplementing the bank loan with a mortgage loan.
But just because it’s an option doesn’t mean it’s a good one. A mortgage to buy money comes with huge risks for the seller and higher prices for the buyer.
Here’s what you need to know.
What is a mortgage to buy money and how does it work?
Money purchase loans, also known as seller financing or owner financing, allow buyers to avoid banks altogether as the seller acts as the lender. It is used primarily for buyers who may find it difficult to obtain a bank loan.
This is different from the traditional bank home sale. In a sale, the lender bank uses the proceeds from the buyer’s down payment and the loan to pay off the existing mortgage and the closing costs. Sellers keep balances as profit.
However, the bank does not participate in a mortgage with purchase money. Instead, the seller replaces the bank as the lender. There are many ways to structure this, but in essence, the home buyer makes payments directly to the seller as if he were a bank. The buyer signs a loan agreement with the seller that sets out the terms of the loan, such as the interest rate, loan amount, and monthly payments.
Types of purchased money mortgage situations
A money purchase mortgage can be structured in several ways.
Bank loan with a cash mortgage. A money purchase mortgage can be used in addition to a bank loan if the buyer cannot obtain a loan large enough to cover the housing costs. For example, a buyer can purchase a $ 300,000 home with a $ 200,000 bank loan, a $ 50,000 prepayment, and a $ 50,000 mortgage loan.
Land contract… The seller and the buyer agree on the amount of the down payment, the price of the house, the frequency of payments and the interest rate. The home buyer does not receive full legal title to the property until the final payment of the loan is made.
Possible mortgage with redemption mortgage. With the approval of the seller’s mortgage lender, the buyer assumes the seller’s existing mortgage terms. The difference between the balance on accepted mortgage and the sale price of the house can be financed with a mortgage to buy money. For example, a buyer assumes that the seller has a $ 250,000 mortgage, terms of payment, and an interest rate. But the house is listed for $ 300,000. The buyer could have used a $ 50,000 mortgage to cover the remainder.
Buying Money Pros and Cons of Mortgages for Buyers
Because regulations require banks to adhere to strict lending requirements, there are a number of factors that can deny an individual or property the right to receive funding. “Loans to buy money offer buyers easy financing. [because there are] no limits on debt, credit rating or down payment, ”says Hai Nguyen, a former credit supervisor at Wescom Credit Union in California.
While it may be easier for a buyer to buy a home with the help of a seller, that doesn’t mean it has no downsides. If you are a home buyer with credit problems and cannot qualify for a traditional mortgage loan, you are likely to pay a higher total price for a home with a mortgage to purchase. This explains the risk that the owner now assumes the bank is assuming. The house is likely to be listed at a higher price and the interest rate will also be higher.
Here are a few more pros and cons to consider for buyers:
More flexibility in negotiating loan terms
Reduced closing costs
Possibility of faster closure by abandoning the bank approval process
Option for buyers with bad credit history
Difficult to find sellers offering money purchase loans
Interest rates can be higher than a bank mortgage.
Difficult to compare rates of different lenders
Pay a higher price for your home
Higher monthly payments
The seller may default on their mortgage obligations, resulting in a foreclosure, leaving the buyer without recourse or home.
If the seller has a lien on the property, this may complicate the transfer of the legal act.
Possibility of unforeseen repairs as it is usually sold as is
Without title insurance, there is no guarantee that the seller owns the property, leaving the buyer vulnerable to fraud.
Buying Money Pros and Cons of Mortgages for Sellers
For merchants, ignoring the bank’s requirements means that the transaction can be completed faster and cheaper. You can also attract a wider range of borrowers, including those who are not eligible for a mortgage loan from a bank.
But the buyer may not pay the debt and the house may be foreclosed. “Sellers sometimes lack the funds to effectively secure loan payments, at least compared to a financial institution,” says Jason Zarraga, a California real estate agent at Homequest. Eviction or foreclosure processes can be very lengthy and costly, creating a huge risk for the seller if the buyer fails to make payments.
The ability to attract more proposals, for example, those that cannot qualify for funding from the bank.
Closing a transaction can be done faster and cheaper
May charge a higher than market interest rate on the loan
Increased risk of loan default
Payment monthly, not a lump sum.
Due diligence required to assess the buyer’s ability to repay the loan.
Threatened with non-payment of payments, foreclosure or eviction
What do you need to know
A money purchase mortgage offers some benefits and an additional path to home ownership for those who cannot qualify for a bank loan. But there are significant trade-offs.
By eliminating the need for a bank, sellers can benefit financially because a home can be sold faster and with less closing costs without bank fees and checks.
“Seller financing should only be used when the seller has full confidence in the buyer’s ability to repay the loan,” says Zarraga. This is because sellers no longer have confidence that the bank has checked the borrower’s finances to make sure the buyer can afford to pay for the home.
Potential home buyers with bad credit you should consider other options before participating in a mortgage to buy money. You may want to consider a government secured loan such as FHA, USDA, or VA credit… There are also options for low-income families as well as down payment reduction programs who can offer the best financial terms. You can always refer to HUD Approved Housing Consultant.
Be careful with mortgages to buy money. If you are not ready to take all the financial risks associated with this, it is best to avoid them completely.