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Create Ways to Fund a Home Purchase

17 June 2016 No Comment

canstockphoto7017202Buying a home is probably the most expensive thing we will ever do, so it is important that you get it right. For most people, a mortgage is the way forward, but it is important to remember that although a mortgage might be traditional, it is not necessarily right for you.

For example, if the property you want to buy needs a significant amount of work doing before you can move in, taking out a second loan to pay for the remodeling costs is going to be expensive. Instead, it is worth looking at a government insured FHA 203k home loan. If you are not sure whether this is the right one for you, look at 203k loan lenders to see what the lending criteria are.

Whilst applying for a homeowner’s mortgage might be the most popular way to fund a home purchase, there are many other strategies to consider. Some may not be right for your personal circumstances, but it is worth thinking outside the box.

So what are the alternatives if you are not keen on the idea of taking out a traditional homeowner’s mortgage?

Cash Buyer

Buying a property with cash is by far the easiest way to make a purchase. As a cash buyer, vendors will be happy to do a deal with you since the buying/selling process is normally shorter and smoother. Paying cash for a property also means you do not have to worry about finding a lender willing to make you a mortgage offer, or paying interest on a loan. However, most people do not have a huge pile of cash gathering dust in their savings account, so how can this possibly work?

If you are lucky enough to have a wealthy relative or two, consider asking them for a loan to buy a property. For them, it will be a good investment, and for you, it gives you a place to call home. Once you are in a position to buy them out, you can pay off the loan (with interest if applicable). It is a good deal for both of you, but only if the relationship is good. If you do decide to take this route, make sure you have all the paperwork relating to the transaction drawn up by an attorney, to avoid problems further down the line.

Seller Financing

Seller financing is not very common, but under certain circumstances, the arrangement can work really well. The difference between seller financing and a traditional mortgage arrangement is that the buyer makes payments directly to the seller. The seller effectively becomes the lender, so they are in charge of devising a payment schedule and deciding what the interest rate should be.

Most sellers do not want to be in this position, but if the property market is flat and they cannot sell, they might consider such an arrangement. From the buyer’s perspective, this method can work well, as there are fewer hurdles in the way and a greater degree of flexibility. However, it is likely to be more expensive obtaining finance from a seller. They are in it to make money and will charge a higher rate of interest than a regular lender.

Cash In on a Life Insurance Policy

If you have a whole life insurance policy, you could use this to fund the purchase of a property. Whole life insurance continues until you die or cash in the policy. In time, such a policy accumulates cash, so as long as the policy is worth something, you are free to borrow against the value of the fund.

However, there are a number of drawbacks and tax considerations related to borrowing against a whole life insurance plan, so it is essential that you discuss the potential ramifications with your financial advisor.

Rent to Own

A ‘Rent to Own’ arrangement is useful if you want to get on the housing ladder but you don’t have enough money to make a down payment on a mortgage. When you rent to own, you make monthly rental payments at a slightly higher rate, with the option to buy at the end of a specified term. The extra payments you make go towards a future down payment. This type of arrangement will work if you expect to be ready to buy within a couple of years.

Whatever type of funding arrangement you go for, look into the details very carefully and take professional advice before you commit to anything.

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