Alternative Options to Traditional Home Mortgage
Regardless of whether you are a real estate investor, a first-time home
buyer or someone who has purchased multiple homes in the course of your
lifetime, there can be numerous reasons why you do not wish to or are
not able to obtain a traditional mortgage. One of the most common
reasons, especially in the current market, is that lenders may not see
you as an ideal borrower. In light of the recent housing crisis, many
lenders have significantly restricted their wiliness to make mortgage
loans. Any glitch in your credit can prevent you from obtaining a
traditional mortgage. It could also be that you have sufficient assets
but are not able to demonstrate sufficient cash flow each month for the
lender to be willing to extend a mortgage loan to you. This is often the
case with individuals who are self-employed or who recently changed
jobs. Whatever the reason may be, it is important to know that there are
other methods which can be used for financing home purchases.
Whole Life Insurance Policy
Using your whole life policy is one method that many people who find
themselves in similar circumstances opt for in order to make a home
purchase. A whole life insurance policy accumulates cash value over the
long term while you continue to make regular payments on the premium. It
is possible to borrow against the cash value of the policy. When you
borrow funds from a whole life insurance policy, you do not have to
worry about dealing with the loan qualification process. This type of
strategy will greatly increase your borrowing potential but you should
understand that it will also reduce the face value of your insurance
policy if you do not pay back the money. Questions that you should
consider when thinking about taking this route include:
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What is the interest rate on a loan for borrowing against my policy?
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Will the withdrawal be taxed?
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Will this withdrawal reduce my annual dividends?
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How will my death benefit be affected by this loan?
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If I take out this loan, will my policy eventually lapse?
Beyond asking these questions of the insurance company you should also
consider whether you will be able to realistically pay back the loan and
what the consequence of a reduced death benefit will be for your
beneficiaries.
Seller Financing
Another option is to consider seller financing. With this option you are
also able to bypass the lender entirely and will instead make payments
directly to the person who sells you the house. An official agreement
will define such terms as the interest rate, principal amount, repayment
schedule, default consequences, etc. The official agreement is known as
a promissory note. A seller may be willing to offer financing if they
are having difficulty in selling the home or if the overall market is
weak. Many sellers will not consider this option; however, if they do
not actually own the home free and clear or if they simply do not want
to act as a lender and deal with the hassles of collecting monthly
payments. Also, many sellers need to receive the proceeds from the sale
of a property in a lump sum so they can purchase another property.
Self-Directed IRA
Yet another option to consider is borrowing from an IRA that is
self-directed. A self-directed IRA can be a great non-traditional
investing tool. This type of IRA is different from a traditional IRA or
Roth IRA because the IRS allows a self-directed IRA to be much broader
in terms of use. You cannot actually purchase a home for yourself
through the use of a self-directed IRA because the IRS does not allow
that, you can lend money to someone who is not a business partner or
lineal relative to purchase a home.
Rent/Lease to Own
Finally, you might consider a rent to own or lease to own option. This
option makes it possible for you to rent a property for an initial term
with an option to purchase the property at the end of that term. One
thing to keep in mind is that monthly rental payments will usually be
higher than market price, but the surplus will go toward your future
down payment. If you choose not to purchase the property, the additional
rent will be forfeited. Renting or leasing can be a good option is you
are not financially ready to purchase a home but you anticipate that you
will be within the next one to three years. This period of time will
give you the opportunity to save for a down payment and/or improve your
credit so you can qualify for a loan.
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