Loan Types

You Can Buy A House in Many Ways

In basic steps you buy a home by finding one that you want, making a deal with the seller either through a Real Estate Professional or directly with the seller. Once you have agreed on a closing date and decide what kind of inspections and due diligence you want to do on the home then you will have to decide how you will come up with funds to make the purchase. Aside from getting a traditional or even nontraditional mortgage for purchase money a home may be purchased on contract, through lease/option agreements, arrangements with nonprofits or employers and any number of creative options that can be thought up and work for two parties making a deal to create a legal purchase. Once funds are in place then you will go to the closing table, usually in a situation that is an attorney’s office or through and escrow where a disinterested third party collects all of the funds and distributes them once the sale is consummated and recorded.

Homebuying went on for ages before there were mortgages. While this is a blog about mortgages, it is also a blog about buying a home and other real estate, something we have available to us in the free world of modern society. In recent decades the standard take-out-a-mortgage through some type of financial institution has MacDonaldsized the homebuying process, it doesn’t mean that this is the only way. We will start with general ways and things you need to know to purchase a home and then move into the more unique and obscure ways.

Items of general importance in order to buy a home

  1. Save money – it might mean creating a side hustle, or a second job or selling assets, having a garage sale or whatever creative way you can think of. Even if you take out a loan on a USDA or a VA program where you might get away with no money at closing, you are still going to need to have a cushion, funds to get yourself moved and a safety net in the event that mortgage is hard to pay.
  2. If you are getting a loan or a future contract holder is going to pull credit before all sign, you are going to want to have a credit file and have it looking as tidy as possible. There are many ways to do this and cleaning up credit always feels great, though if you have ignored it, you might need to muster up some courage. Check out how to prepare by cleaning up your credit and raising your score.
  3. Check resources with your employer, the city, county and state that you are planning to live in and see what resources that they have for down payments, subsidies, tax deferral or other pertinent options for homebuyers. You might be surprised that there are forgivable 2nd mortgages and special options to live in certain districts, areas or for buying homes to renovate. Employers and nonprofits occasionally have programs that will help with the homebuying process with gifts for certain demographic areas or borrowers.
  4. Engage professionals to assist you – this includes mortgage brokers and realtors. All are in a service based industry where they are typically paid from the final closing of the sale and will not charge for their services upfront aside from things that are actual purchases like a credit report.

Lease Options are rare but still around

If you have a landlord that is motivated to sell, sometimes they will put a certain amount of your monthly rent towards a purchase. This must be documented on their end if your intent is to get a loan on the property. Make sure that the agreement is reasonable and that you keep copies of all paperwork. It doesn’t hurt to run your paperwork and agreement by your mortgage professional at the onset of the agreement, even if you don’t expect to actually purchase for a couple of years. That way you can document as you go in a way that will be acceptable to give you any and all credit at the time of the actual consummation of the sale.

Contract Sales

If you have two parties that are wanting to make a deal and one of the parties owns the property free and clear, doing a contract sale can be a great way to go. This works especially nicely when the rate they offer is less than the current market mortgage rates. In the first home I purchased to live in, at work I was typing note rates of 11% and 12% and we got a seller that would write a 30 year contract at 9% with no prepayment penalty. It was a great deal for my family and the closing costs were cheaper so we were able to maximize everything and start out with a nice down payment. The sellers were retirees and our regular mortgage payment was income for them at a higher rate than they could get in the money market. This made it a win-win for everyone.

Contracts can be written however you agree with your seller on. There are some drawbacks on these though:

  1. If there is only a memorandum of contract recorded in place then that may keep you from obtaining any other financing in the future without an entire refinance.
  2. Make sure you get title insurance and make sure that the seller actually has no other liens at the time your sale is finalized. You don’t want another lien taking precedence over yours.
  3. If they are selling to you on contract with a short term balloon that causes you to refinance in the near future then visit with your mortgage broker to make sure this is going to be reasonable for your situation.
  4. If the seller has an underlying lien and you want to create a deal, ask to see the current Note to make sure that there isn’t a Due on Sale clause and check local and state ordinances for what the rules are in regard to contracts like this. Some states allow a 12 month window after a contract has been established even with a Due on Sale clause. However, I am not a lawyer, nor trained as one and not appropriate to suggest legal advise. This is something that you might want to run by a real estate attorney before signing on the line.
  5. If you are unsure of the value of the property, you may want to hire an independent appraiser to confirm it. This and a home inspection are good ideas just in case the property won’t qualify for financing in the future if you decide to refinance or sell to someone who will be taking out a loan to purchase.

Contracts are a nice way to get in with reduced cost and will often be a win win for everyone. A seller might ask for a credit report or proof of income in the same way a lender does, but overall the deal will just depend on how you and the seller decide to make it.

Hope this helps you understand the “how” part of buying a home from a financial standpoint. Mortgage and Real Estate Professionals are there to educate and assist you in the process. Reach out and find ones you like and trust. They will share your excitement for your big home purchasing adventure!

Kristin M Eklund NMLS #1872091
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