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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:

  • What is the interest rate on a loan for borrowing against my policy?

  • Will the withdrawal be taxed?

  • Will this withdrawal reduce my annual dividends?

  • How will my death benefit be affected by this loan?

  • 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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