In March 2023, the Fed announced another 25-basis point interest rate hike. The fed funds rate has gone from nearly zero in March 2022 to a range of 4.75% to 5%. The goal of raising interest rates is to increase the cost of borrowing, which slows the economy. As a result, home loans, auto loans, credit cards, and other loan costs increase. As the ability to obtain financing becomes more challenging, a Concord Realtor reveals that many homebuyers may seek alternative forms of financing.
Top Types of Creative Real Estate Financing According to a Concord Realtor
Creative real estate financing is the use of non-traditional means to acquire property. This could be an option for those who don’t have large reserves of capital that most banks might require. Here are the most common types of creative real estate financing according to a Concord Realtor:
Lease Option
A lease option provides the option to purchase property after a lease agreement ends. The “renter” makes monthly payments which allow them to build equity over time. In some contracts, the rent payments can count towards the down payment of the home. Lease options are often used by homeowners who have difficulty selling a property and eager homebuyers who don’t meet strict bank qualifications for loans. Payments are typically slightly higher than the mortgage amount to provide cash flow for the homeowner until the lease is up.
Here are a few things to keep in mind about lease options:
- Lease option contracts are typically between one to three years. New lease options can be created at the end of the contract if needed.
- The security deposit is held by the landlord/seller.
- Both parties should agree on what improvements to the property can (or can’t) be made during the term of the lease
- Insurance and property taxes are paid by the landlord/seller.
Home Equity Line of Credit (HELOC)
A HELOC is a line of credit that provides existing homeowners a revolving line of credit that can be used to borrow against the equity of their home. In many instances, HELOCS are used for large expenses or to consolidate debt. Once approved for a HELOC, the credit line can be used to buy property in cash or as a down payment.
Before using a HELOC here are a few things to consider:
- Can you afford the monthly payments?
- Can the HELOC cover the down payment?
- Do you have enough equity in your home (at least 15% to 20%)?
- What are the HELOC interest rates and terms?
The answers to these and other key questions can determine if a HELOC is right for you.
FHA Loans
Created by the Federal Housing Administration, FHA loans are ideal for first time homebuyers who don’t qualify for traditional loans. This type of loan is for those with credit scores of 580 or above and can pay a minimum downpayment of 3.5%. In addition to lower credit qualifications and down payments, FHA loans are popular for the following reasons:
- Shorter qualifying time if have bad credit
- Lenient gift funds
- Low closing costs
For more information on FHA loans click HERE.
Self-Directed IRA (SDIRA)
A self-directed IRA is a retirement account that allows for investing in real estate and other types of alternative assets. While SDIRAs can be set up without assistance, it is often advised to have a custodian who can assist with IRS tax codes and regulations.
Keep the following in mind when using a self-directed IRA to purchase real estate:
- SDIRAs are often used to purchase rental property. Monies are deposited into the IRA and not taxed until you take withdrawals at age 59 1/2.
- Like traditional IRAs, required minimum distributions (RMDs) must be taken at age 70 1/2.
SDIRAs have 2 custodian options:
“Custodian Controlled” Self-Directed IRA. The IRA holder instructs the custodian to purchase both traditional assets as well as alternative investments including real estate for their retirement account.
“Checkbook Control” Self-Directed IRA.” A limited liability company (LLC) is established that is both owned and managed by the IRA holder through a local bank or credit union. An advantage of self-directed accounts is IRA owners can work quickly and without any potential delays from a custodian if they see a deal and want to act quickly.
Note: the IRS Internal Revenue Code prohibits “disqualified persons” (as defined under Code Section 4975 (e)(2)) from engaging in certain transactions or personally guaranteeing a loan associated with their IRA.
Consulting with a tax professional before opening a SDIRA is advised.
Summary
As interest rates continue to rise, many feel their chance at owning a home is nearly impossible. For those who are having difficulty getting a bank loan, creative financing may be just what they need.
About Range Homes
Are you looking to buy or sell a home? Need help determining your next move? Having a licensed real estate agent is essential. Here at Range Homes, we have helped our customers buy and sell homes for years. We also have great market data to help you pick the perfect area and are ready to help you find your dream home during these unprecedented times. Contact us HERE for your real estate needs.
Why Concord CA?
Concord CA is known for its good economy, beautiful landscapes, and extremely popular housing market. When other states and territories have experienced a decline in housing prices the Bay Area, in general, has remained strong. This doesn’t mean you should not diversify your portfolio across many states, but Concord Realtors agree that this is certainly a strong place to start for a novice investor. There are even some great low-cost homes that are ripe for renovation.
We have a team of friendly, helpful Concord Realtors that specialize in East Bay CA real estate and property sales that can help you work out how to best get your property portfolio started. Our agents are here to put your needs first, get you the best deals and offers, help you buy or sell your dream home and build your investment portfolio. Reach out to our team today to find out your options.
If you are looking to find a Concord Realtor, looking for homes for sale in East Bay CA, or even to sell your home with someone who will make sure you get the best deal and understand your needs – look no further – when you work with us, consider yourself family.
