With the lease to purchase, the buyer pays the lease of the home. Within the lease agreement, the buyer purchases the home on the agreed price. Usually, the buyer purchases the home within one to three years. This financing is also called lease to own.
The buyer pays the purchase option fee of one percent to five percent. The purchase option fee will be credited to the purchase price when the buyer actually purchases the home.
On top of the lease, the buyer also pays the premium. The premium which the buyer paid will be credited to the purchase price of the home.
The buyers like the lease option very well. While the real estate market melts down, lease to purchase homes will always be in demand. The buyer needs very little security deposit or down payment.
Even though the buyer has bad credit rating, the buyer can purchase a home with lease to purchase. The lease to purchase can buy time for the buyer to repair bad credit rating. Finally, the buyer will be approved for the mortgage financing.
However, the credit bureau excludes the lease in the credit score calculation. The meaning of credit score is the ability for the buyer to pay the loans and mortgage. The financial institution uses the credit score to qualify the buyer to mortgage financing. In order to repair bad credit rating, the buyer must continue to pay off the credit card and loans.
While the buyer is on the lease, the seller gets to deduct the mortgage interest. Apparently, the mortgage interest tax deduction significantly benefits the seller. The mortgage interest is substantial portion on the mortgage payment.
The lease to purchase locks the price of the home. Thereby, the buyer can build home equity as the home appreciates in value. As the home depreciates in value, the buyer can walk away without purchasing the home. Hence, the buyer loses the purchase option fee, and premium as well.
As the buyer likes the lease to purchase, the real estate agent dislikes the lease to purchase. Because the real estate agent only gets a part of the commission at the start, the real estate agent dislikes the lease to purchase. In the time of real estate market crashes, it is better than nothing.
Many buyers like to try before they purchase. In lease to purchase, the buyer can try the home. If the home is cut to be the dream home, the buyer can complete the sale of the home.
Basically, the buyer loses a smaller amount for unwanted home. Rather than paying huge amount to purchase a home, the buyer only loses the lease, purchase option fee, and premium.
The buyer can grow the home equity faster. In a regular rent, the buyer loses one to three years to build equity. With one to three year in a lease to purchase, the home can appreciates in value. In time, the home and land will appreciate in value. The value may decrease, but it will eventually increase in value.
Basing from strict lending policy, the banks and financial institutions qualify the borrower to fund the mortgage. The borrowers with good credit history will qualify for financing. When the banks and financial institutions reject the financing, the borrowers turn into private mortgages.
Instead of banks and financial institutions, the private individuals, sellers, or investors lend to the borrower for mortgage refinancing. Thus, it is called private mortgages. Sometimes, the private mortgages are also called hard money mortgages.
In the United States, the private mortgages are well known. Even though the private mortgages exist in Canada for a long time, the private mortgages are only starting to be well known.
The private mortgage lenders hold the title or deeds of the property until the borrower pays off the entire loan. If the borrower defaults on the mortgage payment, the private mortgage lenders foreclose the property for resale.
The private mortgage clauses can include balloon mortgage payment. At the maturity of the mortgage, the borrower pays the large final mortgage payment to pay off the mortgage. This is more commonly known as balloon mortgage payment.
There are many ways to tarnish the credit ratings. When the borrowers suffer from bad credit ratings, the banks and financial institutions reject the mortgage financing. Thereby, the credit ratings remain stagnant. The credit ratings stay bad for a very long time.
In a way, the private mortgages help to repair bad credit rating. The private mortgage lenders take the risk to lend to the borrower with bad credit ratings. As the borrower pays the mortgage, the borrower rebuilds the good credit rating and builds the equity.
Higher risks means higher returns. The private mortgage lenders charge higher interest rate for riskier mortgage financing. As the borrower improves the credit rating, the borrower can switch to the conventional mortgage with lower interest rate.
The private mortgages are for select type of borrower. The borrowers are facing foreclosure, defaulting mortgage payments, failing mortgage application, and needing quick close.
The borrower also needs the equity to qualify for private mortgages. The private mortgage lenders accept up to seventy percent loan to value ratio. For example, the home is appraised for $350,000. The private mortgage lenders can lend up to $245,000 ($350,000 x 70%).
The hard money mortgages are mortgage refinancing at a higher interest rate which is offered to borrowers with bad credit history. Using the property as collateral, the borrowers with bad credit history try to get mortgage refinancing on fifty to seventy percent of the market value. Hence, the hard money lenders require equity on the property.
The hard money mortgages started in the 1950s. The term of hard money mortgages are more common in United States and Canada. After the mortgage lenders suffered the meltdown of hard money mortgages on early 1980s and 1990s, the mortgage lenders lowered the loan to value ratio. The financing of property that exceeded the market value was to blame for the meltdown.
Banks or financial institutions would normally reject the financing on extreme case of bad credit history. At the beginning, the borrowers seek the mortgage refinancing on conventional mortgage refinancing. After the borrowers exhaust all possible mortgage refinancing options, the borrowers seeks the hard money mortgage refinancing as the last resort.
The hard money lenders are typically the investors group, trust, or private individuals. Unlike banks or financial institutions, the hard money lenders will take on the risks. In return, the borrowers pay between ten to nineteen interest rates. When the borrower defaults on mortgage payment, the hard money lenders charge between twenty and twenty nine percent. The annual percentage rate would normally ranges between nineteen and twenty eight percent.
The points always exist on hard money mortgages. It is normal to see four to ten points. In return, the borrower prevents the quick sale or foreclosure of the property.
The hard money lenders accept from fifty to seventy percent of loan to value ratio (LVR). For example, the home property has a market value of $300,000. The hard money lenders can lend as much as $210,000 ($300,000 x 70%).
The equity on property must have appreciated for years. The borrowers gain equity on property as the borrowers pays off the mortgage, fixes up the property, and adds capital improvement.
Investors can structure the mortgage in such a way to be a great investment. The human mind seems to keep on finding newer ways to make a significant profit. Here are common ways to get a mortgage for investment.
The investors pool all their money together. The investors use the pool of money to lend to the borrowers. Meanwhile, the investors earn the interest from the pool of money. This is more commonly known as mortgage-backed security.
Interest Only Mortgage
In interest only mortgage, the investors pays only the interest for the specified duration. Since the investors pay only the interest, the mortgage that the investors own stays the same. The investors patiently wait for the property to appreciate in value. When the property appreciates in value, the investors sell the property with the market price. Thereby, the investors earn a capital gain.
Buy To Let Mortgages
The investors can acquire several properties thru buy to let mortgages. With the property, the investors find tenants who want to rent. As the tenants pay rent each time, the investors uses the rent to pay off the mortgage and build home equity. When the property appreciates in value, the investors earn capital gain. If the property fails to appreciate in value, the investors can still successfully build home equity. Thereby, the investors can still earn capital gain.
Discounted Investment Mortgage
The investors can purchase an existing mortgage on a discount. Thereby, the investors earn a profit on the difference. An existing mortgage is a mortgage in which the borrower is already paying off the mortgage. For example, the total mortgage comes to $100,000. The investors purchase the mortgage for $90,000. As a result, the investors earn $10,000.
Oftentimes, the investors are looking for property at a bargain price. The investors will take a mortgage to acquire the property. If the property needs some fixing, the investors will fix up the property to drive the price higher. Finally, the investors sell the property at a higher price. This is more commonly known as flipping.
Hard Money Mortgages
The investors are private individuals who lend to borrowers with bad credit rating. Most of the times, the borrowers with bad credit rating can only be approved on a mortgage at a higher interest rate.
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