Getting a buyer qualified for a home loan isn’t as easy as it once was. The aftermath of the foreclosure crisis, astronomical student loan debt, wage stagnation and the gig economy — all of these have made it harder for prospective homebuyers to qualify for a conventional mortgage, or even for a lower down payment option like an FHA loan. And there’s a degree of uncertainty in what’s ahead, so it’s best to brush up on buyer options now.
Alternative financing options can provide additional possibilities, but they can also make your buyers the target of scammers. However, according to Eric Jeanette, owner of Dream Home Financing and FHA Lenders, “There are reputable lenders who can help, and most are not scammy.”
“They are lenders who are not household names, which is why some people may get a bit nervous when researching these options. Some of these lenders do a much better job than the well-known bank around the corner.”
Than Merrill of FortuneBuilders agrees. “There isn’t a single source of alternative financing designed to complement every buyer’s scenario, but there are several sources of capital that have been carefully underwritten to assist in the most unique circumstances.”
According to Merrill, the best financing scenario depends on what prospective buyers plan to do once they buy.
“The added costs associated with alternative forms of financing are typically offset by subsequent benefits, not the least of which may include shorter loan durations, asset-based approval, or fewer hoops to jump through over the course of the application process.”
We looked at a variety of alternative scenarios and the pros and cons of each.
Timing is one of the biggest challenges for many homebuyers, whether they need help pulling the equity out of their current home to finance their new home or simply haven’t found the right home yet.
According to Leah Hammerschlag, VP of marketing for EasyKnock, this is the problem that drives their MoveAbility program, a sale/leaseback option designed to provide more flexibility for “people who are planning to move, but need time and money to find and fund their next home. Homeowners get up to 70 percent of the value of their house in a matter of days, and capture the remaining value once the house is sold on the market with a Realtor.”
According to Hammerschlag, unlike traditional iBuyer options, MoveAbility offers homesellers a variety of ways to control the logistics of their sale, including avoiding contingencies, funding home improvements and paying down debts.
In addition, MoveAbility centers real estate agents and brokers within the transaction, providing “a revenue-generating bridge tool that allows Realtors to secure more clients, receive commission upfront and close more deals. With our program, agents and brokers can provide a solution to clients who may struggle to qualify for a second mortgage, due to an existing mortgage,” Hammerschlag said.
EasyKnock clients continue to work with their agent or broker throughout the transaction. This is a great way to help clients take advantage of the quick sale iBuying promises while preserving the agent-client relationship. In addition, once the home is sold, Hammerschlag said, “the client receives the remaining value of the house, capturing its full market value.”
We heard a variety of thoughts, good and bad, from agents, investors and financiers who had dealt with seller financed deals. While some had seen good results in certain cases, most warned of the possible pitfalls.
Stan Mead, CEO of Summit Home Buyers, said that his company prefers seller financing. “A promissory note is negotiated between the two parties, and the buyer assumes the responsibility of making timely payments to the seller as agreed upon in the note. All the details of the loan are outlined in the promissory note, like: down payment, interest rate, length of the loan, balloon payments, late fees” and so on.
However, Mead warns, there are risks on both sides of a seller-financed transaction. “The seller runs the risk of not getting paid back and having to foreclose on the house. Risks to the buyer may include costly loan fees, exorbitant late fees, or the risk of the seller foreclosing on your home if you get behind on payments.”
According to Caleb Liu of House Simply Sold, seller-financed agreements are drafted in favor of the seller. “These arrangements specifically target wishful homeowners who fail to qualify with a traditional lender and carry an interest rate significantly higher than a traditional mortgage. A buyer needs to be careful and read the contract in full, preferably with the assistance of a real estate attorney.”
“Remember,” Liu said, “generally speaking, the more ‘creative’ you get with financing, the more risk you take on.”
Hard money loans
Long a favorite option for investors, hard money loans can be an option for homebuyers under specific circumstances. Its biggest drawback? Higher-than-normal interest rates and sometimes painful repayment terms.
According to Daniel Hume of Acucor Capital, a property management group out of Cincinnati, a hard money loan has “a higher interest rate, but it covered all my costs to purchase, close and renovate” his current investment property. He calls his hard money loan a “great short-term vehicle for increasing value in a property” and plans to refinance into a more traditional long-term loan within a year.
Because hard money lenders are used to working based on the projected value of a home post-renovation, they may be a good option for buyers who are planning to purchase a fixer-upper or add significant value in an up-and-coming neighborhood.
Financing for special circumstances
Millennials and Generation-X homebuyers are often at a disadvantage when it comes to the traditional underwriting process. These groups have a higher rate of entrepreneurship and self-employment and, in many cases, bore the brunt of the financial setbacks caused by the Great Recession.
According to Matt Hackett, operations manager at Equity Now, the key to helping these prospective buyers is developing alternative ways to qualify them.
“There are programs for self-employed borrowers to qualify by developing an effective income calculation based on deposits into personal and/or business bank statements,” Hackett said. “There are also programs which qualify the purchasers of investment properties based on the rental income from the specific property and not based on the personal income of the borrower.”
Hackett said that both of these programs work well for many borrowers, helping them “obtain sustainable and well-suited financing at competitive interest rates.”
Hackett’s word of warning? “The general adage of ‘if it sounds too good to be true, then it probably is’ holds in this case as well. Do your research, and verify references before getting into the process with any lender.”
Christy Murdock Edgar is a realtor, freelance writer, coach and consultant with Writing Real Estate. She is also a Florida Realtors faculty member. Follow Writing Real Estate on Facebook, Twitter, Instagr