What is Creative Financing?
Earl L. Huse, JD
May 13, 2008
Experts are seemingly thinking new concepts of every day. As an example, think for a moment about real estate loans. Can you remember when there were only a few loan types available? When a fixed rate mortgage was really fixed for 30 years? Remember when mortgages were assumable? When Adjustable Rate Mortgages had no lifetime caps? Well, today things are certainly different in the mortgage world. A fixed rate, as an example, can be fixed for 5, 7, 10, 15, 20, 30 or 40 and who know what other types of fixed rates are being proposed today. All these terms of the loan make monthly mortgage payment and qualifying guidelines entirely different.
When some financing markets get a little difficult for a potential buyer to qualify for a real estate loan, some lenders get creative in their approach to lending and qualifying a buyer. They want to make money on the investments they have available to them and they need to get the money available to them lent as soon as they can. As an example, perhaps a lender has a commitment of say $10,000,000.00 with a proposed rate of return to investors of 8% per annum. And further suppose that the current fixed mortgage rate by the typical lender (competition) is at 7-¾%. One way the lender could market this higher interest rate is to exaggerate the underwriting guidelines to increase borrower´s debt ratio´s, or, extend the term of the loan to 45 years which would decrease the principal & interest payments thus reducing the borrower´s debt ratio´s to ease his qualifying.
In the above scenario, the lender could also offer a 100% loan-to-value program and do one of several ways to entice a borrower:
A 80%/20% loan. Whereby the lender offers an 80% loan-to-value 1st trust deed at 8% interest amortized over 30 years and a 20% 2nd trust deed at 9% interest amortized over 15 years.
A 75%/25% loan. Whereby the lender offers a 75% loan-to-value 1st trust deed at 8% interest amortized over 30 years and a 25% 2nd trust deed at 9% interest amortized over 15 years. (This could be a "NO INCOME QUALIFYING LOAN") fully assumable to a qualified buyer.
A 70%/15%/15% loan. Whereby the lender offers an 70% loan-to-value l1st trust deed at 8% interest amortized over 30 years, a 15% 2nd trust deed at 9% interest amortized over 30 years, and the seller to carry back a 15% equity position loan at whatever agreed term structured between buyer and seller. (This could be a "NO INCOME QUALIFYING LOAN") fully assumable to a qualified buyer.
Or just about any other combination of structuring that the lender could arrange in order to be competitive at the time in order to lend the available funds to homeowners.
At one of my creative finance seminars in Anaheim, California while presenting to a group of fellow attorney´s the ideas of alternative methods of finance, a question was asked if it was really possible to own a home in today´s complex real estate finance marketplace without having any monthly mortgage payments. It was followed by another question asking if a person had no money at all, except for their home, could that person as well structure financing that would enable him to have reduced or no monthly mortgage payments? The answer is yes to both questions, but it cannot and will not happen overnight.
There were several questions asked about zero mortgage payments which included but were not limited to the following:
If a person had purchased a home using their VA benefits, was an average worker with little or no money saved, could this person have a zero mortgage payment?
How about the FHA purchaser who used only 3% as their down payment and had to borrow that down payment and that person was a minimum wage earner, could he have zero mortgage payments?
If a person owns a small parcel of land (a lot) free and clear, he is currently a renter because his credit isn´t the best and has less then the minimum down payment saved or available to purchase, his income is not sufficient enough to qualify for a good real estate loan, how can he benefit from securing financing and having zero mortgage payments?
A client owns three 4-plex units that were purchase about 4 years ago out of foreclosure through a local bank. The bank re-secured the financing for the borrower because his credit and income was excellent and the units have good cash flow and are rarely vacant. plus the buyer had rental experience that was a plus. What are the possibilities of the client in this case having zero mortgage payments on all the 4-plexes?
A client owns a commercial building (which has been leased for 6 years with 4 years remaining and the tenant has the option to extend the lease at the same rate with the exception of an adjustment to the lease based on the property tax and insurance increases), a 80 unit apartment building which was purchased from a foreclosure auction (averages a 90% occupancy), He also owns5 rental properties (single family homes) purchased at various times and under various circumstances (all occupied), and, of course, his personal residence which is valued at $475,000.00 and has a loan balance of $225,000.00. How can he have zero mortgage payments on his properties, and is it possible to have zero payments on all the properties?
If a person owner a mobile home, say it had a value of $35,000.00 with a mortgage of $20,000.00 (interest rate at 12% for 15 years) and the owner did not own the land, but the space was in a mobile home park and the rental space was $200.00, the owner had limited income (minimum wages) his credit was good, had about $3,000.00 available to him in savings and cash advances on credit cards, could his mortgage payments be reduced to zero and then reduce his credit card debt to zero?
It would be nice to think that all one has to do is just apply for a loan and that they would automatically be approved, no matter what their job stability is, their credit history, income is and if they have the ability to repay a loan. Well, this is real life, and things do not happen that way in the mortgage banking industry.
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