Creative Financing

When someone calls me on the phone as says, “I need some creative financing” to buy the house they have fallen in love with, it usually means “I have no down payment”, or ‘I don’t have a job right now”, or “I have lousy credit and no one else would loan me the money”, or (my favorite) “I’m in the middle of bankruptcy that was caused by bill collectors”!!

Well, the facts are that maybe we can get around the no down payment problem, or the lousy credit issue, but you do have to show an ability to repay the loan (income!). You cannot expect to get a loan while in the middle of bankruptcy either.

So where does creative financing come in? Creative financing is really nothing more than finding a lender that has lending rules which will work around your particular problem, provided, of course, that it all makes sense and you are not creating a situation that will ultimately cause you to fall behind and lose your house.

Here's some examples of lending rules (other than the routine stuff) that can assist an otherwise worthy borrower with their purchase:
Self-employed - The tax return shows -0- income but we all know that hefty write-offs were the reason for a low income. We do a No-Income Verification loan. Forget the returns, just tell us what your real income is. Of course you will be required to have a larger down-payment for this, typically 24%-30%.
No Down Payment - A young couple can make the payments but cant seem to save any down payment money. We go for 100% Financing by asking the seller to carry back part of the purchase, or having Mom & Dad (who else) offer gift money for the down payment (this will probably require 25% gift or seller carry-back). There are some programs such as VA, FHA, or Farm Home Loan that offer 100% financing as well. Farm Home has income limitations and would require that the Borrowers have minimal other debt.

Bad Credit - The Borrower has everything except good credit. We go to a B/C Lender for the loan. What is a B/C Lender anyway? A good loan (excellent credit, income, etc.) is called an A-Paper Loan. B-Paper loans are for those with less than sterling credit or income, C-Paper loans - well you get the idea. We can go all the way to D-Paper loans for the really incorrigible Borrower. Keep in mine that each level downward requires more downpayment and higher rates and fees. Of course some B/C lenders will allow the Seller Carry-back or Gift option but don’t expect low, low payments. Some lenders will even provide a 1st TD loan and a 2nd TD loan on top of that for 100% financing - expect to pay the price!

To summarize Creative Financing, it isn’t a substitute for common sense or prudent lending practices. For every deviation from the ‘norm’ you pay extra. At some point, even the most liberal lender will say “NO” if you’re setting yourself up for failure later on. The intent of creative financing has always been to provide home purchasing money for those that can reasonably afford the home and make the payments but seem to have unusual circumstances that would cause a “vanilla” lender to decline the loan. If you feel you have unusual circumstances that would scare the bank, ask about a B/C loan to see if indeed creative financing was all that you needed (be sure to weigh the costs). Often a B/B Loan is what you need to get started with the idea of refinancing into a better loan in a couple of years.

If there is one thing I have learned over the years, it’s that no two loans are alike, and each file is unique in it’s character. Don’t assume you are ineligible for a home loan until a knowledgeable Loan Officer has reviewed your circumstances. There is a myriad of ways to deal with the unusual circumstances too numerous and technical to set forth in this article, however, suffice to say many people have gotten loans via Creative Financing that would otherwise still be renting their apartment. If it makes sense, there is probably a way to get it done. Most lenders will have some ability to deviate from the normal rules, Mortgage Brokers generally have the most options in this regard.

    Article By Pete Betlam, owner of
    Cornerstone Mortgage Co.,
    Bellingham, Wa.

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