Creative Financing For Real Estate Investors By Derek Weeks At Isnare.com Ezine Articles

Many aspects of the financial industry are cyclical, meaning they have a discernable pattern of rise and fall, of good returns and of losses. The mortgage industry is no exception to the cyclical nature of the financial industry. Traditionally, to purchase a home, one would have to make a down payment, usually at least 20% of the purchase price and would finance the other 80% with a local or mortgage company. These loans were not easy to get and a common hyperbole in the industry was that in order to get a mortgage, you had to prove to the lender that you didn’t need it.

In the 1990s, and until the beginning of the mortgage meltdown in 2005, mortgage brokers were able to offer a wide variety of creative and non-traditional financing options for real estate investors purchasing houses to remodel and re-sell or to keep as rental properties. During that time period, an example of creative financing was the blanket lien, in which the borrower was purchasing multiple investment properties in the same area and the lender would extend one loan that placed a lien on all the properties.

Another example of creative financing for the real estate investor was the seller carry back, or the seller financed second mortgage. This was a loan designed to avoid the down payment requirement and to avoid private mortgage insurance(PMI). In this loan scenario, the seller would hold the note for a second mortgage on the property, usually for 20% of the purchase price and the traditional mortgage lender would extend a loan for 80% of the purchase price. By keeping the primary note under 81%, the borrower would not have to pay the PMI, which in some cases could be a significant amount.

Probably the most popular and widely used option over the past few years was the private financing, hard money loan. These loans are ideal for the average investor as they will not only fund the purchase of the home but also provide money for the rehabbing and fix up of the property. Finding private financing can be quite challenging but has a high return of reward for your efforts.

Yet another loan scenario available for real estate investors at that time was known as the 80/15/5. In this loan scenario, the primary mortgage lender would extend a loan for 80% of the purchase price, an additional loan as a second lien for 15% of the purchase price, and the borrower would make a 5% down payment. Despite the fact that the same lending institution extended both the first and second mortgages, this scenario would also allow the borrower to avoid having to pay PMI.

Loans like this have largely if not entirely disappeared today, due to the woes of the mortgage market. In true cyclical fashion, the mortgage market has mostly reverted to what it was twenty five years ago, when the best deal to be had was a 20% down payment. Today, creative financing ideas for the real estate investor are largely limited to leases purchases or contracts for deeds, both of which allow the investor to purchase the property while leaving the original loan and seller in place.

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