Most homeowners understand the concept of a home mortgage. In fact, a recent study by researcher Sharanjit Uppal found that between “1999 to 2016 the median amount of mortgage debt among Canadian families with a mortgage almost doubled1.”
Data shows, as well as through popular belief, that a traditional mortgage is the main way to purchase a new home. But did you know there are other ways you can finance the purchase of a new home?
Alternative financing options have gained some traction in recent years. Buyers are finding that underwriting and eligibility requirements for new mortgage financing are becoming increasingly rigorous, especially amidst the COVID-19 pandemic.
New lending standards may be a barrier to entry for new buyers looking to penetrate the housing market but may not meet the new credit or income eligibility criteria.
Conversely, other financing solutions may offer a solution to this segment of borrowers looking for a new home loan.
Here are three alternative financing options to consider when you are reviewing your financing options.
Are you looking to purchase a new home but you know your credit or income may not meet the standard guidelines for a mortgage through a traditional lender? An installment land contract may be the solution to your needs.
An installment land contract is an agreement with the seller of a property to provide financing to you, the buyer, without you having to obtain a loan through a normal financial institution. The seller will convey to you the right to possess the property and in return you will pay the seller a monthly installment payment for the purchase.
A portion of the installment payment is typically structured to go both towards the principle balance owed, as well as accrued interest. The seller retains legal title of the property until the agreement is paid off2. After the payoff, the deed is then recorded and full ownership transferred to the purchaser.
One downside to an installment contract, at least for a seller, is that if a buyer defaults on the agreement, there aren’t as many, if any, protections coinciding with foreclosure.
However, provisions can be built into the agreement regarding a breach of contract by the buyer for failure to make payments2. In this scenario, the seller would most likely regain possession of the subject real estate and retain any previously paid installment payments2.
As home prices continue to increase and are expected to increase by just over 3% in 2020, new buyers looking to enter the housing market may find it burdening to come up with heftier down payments that are typical with conventional mortgage financing4.
To combat this trend, borrowers have been increasingly turning to rent-to-own or lease-to-own purchase programs. Unlike a traditional purchase transaction, a rent-to-own plan allows you to rent a new home for a period of time, at which point once the agreement has been fulfilled, you have the option to purchase the real estate outright, through traditional or other means.
While there are costs and fees associated with choosing a rent-to-own plan and a smaller down payment may be required up front. However, in many cases, a portion of your monthly payment goes toward an additional savings component which is later added to the initial down payment and used against the future purchase price should you exercise the option to purchase the home down the road.
One downside with a rent-to-own plan is that buyers must absorb additional risk. While they can save for their purchase over time, if a property owner gets foreclosed on, you lose the option to purchase in your current agreement and have to work with the foreclosing bank to purchase the property.
Another way to borrow money without going through a traditional lender, such as a bank or credit union, is by utilizing a private money lender. Private money lenders are usually investors or individuals who will lend money using your home as collateral.
While private lenders usually require less documentation than a traditional lender, that does not mean they will write any loan. Hard money lenders still complete due diligence to make sure you can repay the debt; however, they may look at other compensating factors rather than a narrow review of your credit request.
For example, a hard money lender may care more about your general history of borrowing and being able to repay your debts, as opposed to your physical credit score.
Although hard money loans are an option, you’ll still need to have healthy finances. If you don’t have a healthy financial picture, you can still get a loan, but you’ll expect to pay much higher premiums to offset the investor or individual lender’s risk in the transaction.
You should also expect to have some skin in the game, meaning that you may have to put a sizable amount of money down. This is not always a requirement for all private lenders. We at Freedom Capital can help you acquire financing even in the most challenging situations.
If you’re interesting in acquiring financing, contact us today to discuss your goals and alternative financing needs. Click here to explore our alternative financing products.
1 Uppal, S. (2019, August 08). Homeownership, mortgage debt and types of mortgage among Canadian families. Retrieved from https://www150.statcan.gc.ca/n1/pub/75-006-x/2019001/article/00012-eng.htm
2 Practical Law – Installment Land Contracts. (n.d.). Retrieved July 6, 2020, from https://ca.practicallaw.thomsonreuters.com/6-511-8789?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1
3 Pritchard, J. (n.d.). Pros and Cons of Hard Money Loans. Retrieved July 6, 2020, from https://www.thebalance.com/hard-money-basics-315413
4 Services, R. L. (2020, January 09). Canadians can expect a vibrant spring real estate market, with home prices rising modestly. Retrieved July 6, 2020, from https://www.newswire.ca/news-releases/canadians-can-expect-a-vibrant-spring-real-estate-market-with-home-prices-rising-modestly-884135807.html#:~:text= According to the Royal LePage Market Survey Forecast, released in, in 2020, rising to $669,800.
Do you have bad credit, low income, over-leveraged, or looking for solutions outside the conventional lending box? Are you tired of the bank bureaucracy, politics or games? With the marketplace changing and the bank’s rules becoming more stringent, it is extremely difficult working with the traditional banking solutions and it is not for everyone.