Some buyer’s don’t qualify for conventional loans due to either lack of funds sufficient for a down payment or because of previous credit problems.

If this is the case, buyers can seek alternative ways to creatively finance their purchase.

Seller financing

Most creative financing involves the seller financing the buyer. It may be easier to obtain this type of financing on a property that has been difficult to sell due to market conditions, etc.

 

The buyer may be able to assume an existing loan and give the seller a second mortgage for his equity. If a seller intends to invest the proceeds of their sale in a savings account, then he or he may be induced by the buyer to “carry the paper” and receive a higher interest rate than a bank would pay. This type of financing is also known as a “carryback.” 

In addition, carrying the buyer will give the seller a greater monthly return than the purchase of annuities – and if the seller dies, the balance due is payable to their heirs. 
  The owner is also more likely to come out of the situation with more cash than they originally invested as their down payment. The offer from the buyer can be made more convincing by offering incentives to the seller such as graduated payments or interest payments. This may induce the seller to agree on a low down payment or monthly payment in exchange for larger payments in the future.

Using mortgages

There are three ways you can use an existing loan to buy additional property:

  1. Offer the mortgage or trust deal as down payment on another property.
  2. Sell the mortgage or trust deed to obtain cash for the purchase. This may require selling the loan for less than face value (“discounting the loan”).
  3. Use the mortgage or trust deed as security to borrow from a lender.
 

Alternative methods of raising cash

You may be able to raise the cash needed for a transaction through the following:

Insurance policies: For a low rate of interest, you can borrow against the loan value of a whole life insurance policy.

Retirement accounts: You may be able to buy and sell real estate within a self-directed IRA account. Likewise, some 401K are now allowing investors to put their retirement funds into REITs (real estate investment trusts).

Personal property: Borrowing on personal property usually carries a high interest rate and should only be used for short-term loans.

Family loans: Relatives can help you qualify for a loan by co-signing. Or if you feel comfortable asking for cash to make an investment, make sure the agreement is in writing and preferably bears interest.

Credit lines: Ask your bank about a line of credit. This would provide instant cash for deposits with offers and money for short term loans. A line of credit may be tied to a home equity loan.

Credit cards: Your credit card can be used to provide readily available money for a type of swing loan until more permanent financing can be obtained. Also, banks often offer cardholders cash credits lines that will be charged to their credit card account. Be sure to look at fees and interest rates, which vary widely on these offers.

Redevelopment funds: Property in certain areas my be eligible to receive low interest loans from local redevelopment agencies looking to increase property values in a specific area.

 

The ability to purchase real estate is directly tied to creditworthiness. It is important to have a record of timely payments to show that you can meet obligations.  This will establish the level of trust necessary for lenders to invest in you. 

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