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3 Alternatives To Traditional Mortgage Loans

On Behalf of | Mar 18, 2016 | Real Estate Transactions

Many home buyers are under the impression that there is only one way to complete a real estate transaction. In reality, there are a variety of options. You do not necessarily need to take the traditional approach and get a mortgage loan from a lender.

The three most common alternatives vary in terms of the control they afford either the buyer or seller. They also have varying tax implications. These options include:

Seller Financing

Also referred to as owner financing, this option allows the purchaser of the home to make installment payments to the seller over a specified period of time and at an agreed-upon interest rate. There is typically a down payment, as usual. A purchase agreement must be created to specify remedies for the seller in the event of nonpayment, among other things.

Lease With Purchase Option

This alternative to the traditional home mortgage is exactly what it sounds like. It creates a landlord/tenant agreement in which the tenant has the option to purchase the home. One of the key distinctions from a traditional real estate transaction is that this is an option, not a commitment. In a typical purchase agreement, both parties have an obligation to complete the transaction. In a lease with purchase option, the landlord has the obligation to sell, but the tenant may choose not to buy the home.

Contract For Deed

This option is somewhere between seller financing and leasing with a purchase option. As in a seller financing arrangement, this option involves the buyer making installment payments over a set period of time at an agreed-upon interest rate. However, it is similar to a lease in terms of how the seller retains ownership of the property.

What Are The Benefits Of These Options?

All of these options allow you to cut out the middleman, which can save time and money for both the buyer and seller. There is more that can be negotiated directly between the two parties, including interest rates that may be more favorable to one or the other. For example, if a buyer does not qualify for a traditional mortgage loan, he or she may be able to purchase a home with seller financing at an interest rate that benefits the seller.

What Are The Drawbacks?

There are risks involved. For example, if a seller is unaware of or fails to communicate encumbrances, it could prevent the buyer from obtaining title even if payment is made in full. The key is to work with an attorney experienced in these forms of real estate transactions. Attorney Matthew Obermeier can offer guidance about whether one of these options makes sense for you. He can draft a contract that affords you the necessary protections or review a contract that has been presented to you and negotiate as needed.