Alternative Sources for Rental Real Estate Mortgage Funding
- There's nothing wrong with alternative mortgage funding; it's just hard to find.VisionsofAmerica/Joe Sohm/Photodisc/Getty Images
During the housing bubble of the 2000s, as long as you could sign on the dotted line, you could get a mortgage for either your own home or a rental property. Post 2007, even if you have great credit and demonstrated assets worth more than the property you're trying to buy, owning too many properties or making your living from periodic capital gains instead of a bi-weekly paycheck are enough for a loan rejection. Creative financing is still available, however. You just have to look a little harder. - In seller financing, the property seller owns the property free of any mortgage and agrees to take back a mortgage for the buyer. Unlike a bank, the seller can determine what qualifications the buyer must meet. Notes from sellers are generally for shorter terms than traditional loans: three to 10 years but amortized over 30 years. Some are interest-only and require a balloon payment at the end of the term. Most sellers will want a down payment, but the amount is negotiable. Sellers who finance are often interested in generating an income stream from your mortgage payments and, for rental properties, avoiding the sting of a lump-sum capital gains tax.
- A hard money lender is a private lender not regulated as a bank or other lending institution. Hard money lenders are generally more interested in the collateral -- the equity value of property you plan to buy -- in deciding how much money to lend. They want to see large down payments, usually at least 35 percent of the purchase price. They often charge much higher interest rates than banks, charge points and, like sellers who finance, lend for shorter terms. Some hard money lenders advertise on the Internet; many operate only through word of mouth. The goal of hard money lenders is to yield a high rate of return on their investment while risking little because of a favorable loan-to-value ratio. If they have to foreclose, they are assured a solid equity gain.
- Friends and family can help you purchase property in any one or combination of ways. They can provide a mortgage, they can partner with you to buy or they can co-sign a traditional mortgage if they are able to meet loan qualifications that you can't. The manner of arrangement is entirely flexible. If you choose something other than a standard mortgage that they finance, however, write a partnership agreement that clearly delineates time-frames, interest rates, profit splits and a process to end the agreement amicably.
