Key Takeaways
- It is entirely possible to buy a home with bad credit and no money down, so long as you follow several guidelines.
- Using creative financing ideas to fund an investment property or second home can help both investors and homeowners.
- FHA Loans, Home Equity Loans, and Self Directed IRAs are just a few examples of tools investors and homeowners can use to fund a real estate deal.
Whether you’re a real estate rehabber looking for ways to fund your next investment property or a prospective homebuyer looking to purchase your dream home, having a few creative real estate financing strategies up your sleeve can be a huge help. If achieving financial freedom is your priority, real estate is your solution. Don’t let a lack of capital prevent you from conquering your investing goals by employing any of these creative real estate financing techniques.
What Is Creative Financing For Real Estate?
Creative financing for real estate refers to uncommon or unique ways an individual can purchase land or properties that are for sale. An investor or homebuyer would typically make use of one or more creative financing methods when he or she wants to use as little of his or her own money as possible.
Creative financing for investors peaked in the late 1970’s when interest rates were as high as 18 percent. Because it was more difficult to qualify for a loan, the need for creative financing was born.
If you’ve decided you’re ready to buy a home, but traditional banks are accusing you of being a less than perfect candidate (whether it be because your credit score is low or you don’t have enough in savings to afford a 20 percent down payment), the following unconventional methods are your answer:
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Creative Real Estate Financing Ideas
- Seller Financing: The biggest benefit of using seller financing to fund a real estate deal is the fact that you never have to work with a lender (the seller is the lender). Choosing this financing route will result in you and the homeowner establishing your own set of payback and interest rate terms, as well as you paying your mortgage payment directly to the seller. This scenario almost always occurs when the seller owns his or her home free and clear (i.e. the home is paid off and the seller does not have an existing mortgage payment). If in the rare chance the homeowner has an existing loan when he or she sells, he or she must pay back the loan immediately or possibly face foreclosure. Seller financing most often becomes an option when the homeowner is desperate to sell. Perhaps the seller is older and can no longer make the necessary repairs to the home. He or she may offer seller financing for the home “as-is”, which makes the sale available to a larger audience (i.e. buyers who don’t qualify for traditional lending.) The ideal outcome for an investor or homebuyer who utilizes seller financing would be that that investor or homebuyer would qualify for a conventional loan in five years, refinance the property, pay off the seller, and have a mortgage with a bank or mortgage company.
- Rent To Own: This financing option — also known as a “lease option to buy” — is about as simple as it sounds: A buyer is allowed to live in a property as a tenant but with the option to buy that property in the future. Typically, a person will rent the property for one to three years (while taking that time to improve his or her credit score as well as save for a down payment) and will subsequently purchase the home. Choosing the rent to own course usually requires the renter/future buyer to pay an upfront fee (often referred to as “option money”) of anywhere between 2.5 and 7 percent of the purchase price — this fee acts as collateral. Note that if you decided not to purchase the property after the established rental period, you will forfeit that “option money.” Many investors who rent to own often try to strike a deal with the seller that allows them to put the rent they pay towards the future home purchase. So if your rent is 1,000 dollars per month and your contracts states that 25 percent of that will go towards your purchase price, you will have a 6,000 dollar credit applied to your purchase after renting for just two years.
- Hard Money: An investor can obtain hard money from a private business or individual for the purpose of investing in real estate. While the terms of hard money will vary from loan to loan, there are several traits that almost all hard money loans possess. Firstly, the approval requirements for a hard money loan are much less stringent than that of a traditional lender. The lendee’s income does not have to be verified nor does their credit score. Secondly, hard money loan stipulations can vary. Term lengths are typically shorter, interest rates are typically higher, and hard money can often fund a deal in just a few days. Lastly, hard money lenders understand the process of investing in real estate better than traditional lenders (real estate is their specialty after all). Instead of analyzing your credit score and asking for references, hard money lenders will review your rehab blueprint, scope of work, and ARV to determine loan terms. Be sure to have your exit strategy in mind before employing this creative financing option because the last thing any investor wants is for his or her loan to run out (remember, hard money loans are short term).
- Private Money: Private money is very similar to hard money in a number of aspects but is identifiable due to the relationship between the lender and the lendee. Hard money lenders are professional real estate investment lenders while private money lenders typically know their borrower for more personal reasons. A private money loan can come from your friend, family member, neighbor, coworker, or essentially anyone else you feel comfortable asking for money from. Investors can negotiate more flexible loan terms with their private money lender because the entire transaction is less “business” oriented. Lastly, private money lenders very rarely receive any additional cash flow based on equity other than their pre-determined interest rate.
- Crowdfunding: This financing strategy is relatively new and allows investors to use money from the public. There are a number of well-known crowdfunding platforms like GoFundMe and Kickstarter that authorizes users to raise money for anything they want. However, sites like Hatch My House and Feather The Nest are crowdfunding platforms designed specifically for real estate investors and homebuyers. Choose a site, create an account, make your case to the public, and wait for funds to roll in.
Real Estate Financing Loans
- IRA Loans: One way to fund your next real estate deal is to tap into your retirement account. Did you know you can borrow up to $10,000 from our IRA to buy your first home — $20,000 if you’re married. If you’re under 59.5 years of age, you will face a 10 percent penalty fee for withdrawing from your IRA account. Additionally, if you choose to pull from your IRA with the intent of using the money to buy a home, you must find a home to buy within 120 days or else become subject to a penalty charge as well as any taxes that are due. You also have the option to borrow from your 401(k). You can use up to 50 percent of your 401(k) up to $50,000.
- FHA Loans: Backed by the Federal Housing Administration, FHA loans are perfect for first time homebuyers who don’t qualify for a traditional loan. While you are still technically borrowing from a conventional lender, this loan allows those with credit scores of 580 or above to pay as little as 3.5 percent for a down payment. Keep in mind that this real estate financing loan requires an upfront insurance premium of 1.75 percent as well as an annual insurance premium of 0.85 percent of your loan balance for as long as you have the loan (note, this is different from PMI).
- Home Equity Loans & Lines Of Credit: A HELOC (home equity line of credit) or HEIL (home equity installment loan) is ideal for investors or homeowners who already have equity built into a property. Depending on the lender, borrowers can receive up to 90 percent of the value of their home in a loan. The benefits of utilizing HELOCs and HEILs are as follows: Firstly, the loan is based on the value of your primary residence. Second, when you receive the loan, the money is your to do with it what you want. Thirdly, home equity loans come with certain tax benefits like the ability to deduct the interest paid on the loan. Lastly, home equity loans usually have lower interest rates as the loan is secured by your primary residence. Just be careful; when you use these options, your home becomes the leverage.
Creative Financing For Buying A Home
As you can see, there are numerous ways to invest in real estate or purchase a home, even without a lump sum of existing capital. Whether you take advantage of a loan, or use other people’s money (in the case of crowdfunding, private money and seller financing), there is always a way achieve the goal of homeownership.
From securities-backed loans and shared-ownership houses to two-step mortgages and family loans, this in-depth Forbes article provides a number of creative financing examples for buying a home. If you’re unfamiliar or uninterested in investing in real estate (i.e. you’re a prospective buyer simply looking for a place to call home), take advantage of these options.
How can I buy a house without a loan?
Living off one income, downsizing, and taking advantage of an investor are just three ways to buy a house without a loan. If you live with a spouse, significant other or roommate, find ways to cut back so that you can live off of just one income while putting the other person’s income into savings. Eventually, this will allow you to purchase a home with all cash, which requires no mortgage payments.
If you already own a home that has plenty of equity, there is always the option to sell that home, take that profit, and move to a location with a lower cost of living. There are a number of markets where homebuyers can get more house for less money.
If you’re looking to buy an investment property but don’t have the credit score or savings to qualify for a traditional loan, seek out an investor to cover the expense of buying the home. Many investors will pay all cash for a property, which looks very attractive to lenders. Once you fix up the property and flip it for a profit, you can split the proceeds with the investor.
Is it possible to buy a house with bad credit and no money down?
Despite what you may think, there are ways to buy real estate even if your credit is less than stellar and/or you have very little in savings. Taking advantage of the previously mentioned FHA loan is perfect for those who have credit scores as low as 580 (500 if you are willing to put down 10 percent instead of 3.5).
Programs like veterans affairs loans, the us department of agriculture loans, and special grants (like these mentioned in this HomesGuide.com article) allow homebuyers with no money and bad credit to still achieve the dream of homeownership. Terms aren’t always ideal for these individuals— interest rates may be higher and they may have to pay premium mortgage insurance, — but it does allow the possibility of homeownership.
Anyone can buy a home or invest in real estate if it’s a priority to them. Implement any (or a mix) of these creative real estate financing strategies and you’ll be well on your way to building wealth in real estate. Have you had any luck with some of your own creative financing options? Fill us in in the comments below.
