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Here's how some no-mortgage
home-buying strategies work
By Michael
D. Larson • Bankrate.com
 Here
are some examples of how no-mortgage house buying options can work
-- and their potential benefits and drawbacks:
Lease
with an option -- Buyer leases $125,000 home from seller for
12 months at $1200 a month, with $200 a month going into a savings
account for down payment and $1,000 going to the owner. Before moving
in, the would-be buyer pays maybe 4%, or $5,000, of the purchase
price up front as option consideration that goes toward the down
payment. At the end of one year, the buyer gets the home with $7,400
down (his $5,000 upfront plus his savings account) and a regular
loan from a bank that pays off the seller.
Benefits:
• allows buyer to build down payment money
over time via forced savings plan and to "test drive" home.
• buyer can re-establish credit if previous problems
exist by making on-time lease payments for a year or two, which
allows qualification for a regular loan when it's time to buy.
Drawbacks:
• Seller can charge whatever he wants for option
consideration, which is forfeited if the buyer can't buy at the
end of the term.
• Seller can rip buyer off by taking out extra loans
against the property during the lease period, thereby making the
expected title transfer a problem.
Contract
for a deed -- Buyer arranges contract with seller. Buyer makes
payments to escrow agent, who holds deed to the property. After
180 months or some other term of payments to escrow agent, seller
tells escrow agent that payments have been made and escrow agent
gives buyer the deed. Bank never involved.
Benefits:
• Private contract process allows buyer and
seller to negotiate whatever terms they want that are fair and
reasonable.
• Buyer can get into a property even though a bank
wouldn't normally lend them enough money to do so.
Drawbacks:
• Buyer can be evicted if he defaults and isn't
able to "cure" that default by making up for lost payments quickly
enough.
• Buyer doesn't get the deed to the home until the
end of the process, so is not the owner for a long time. If default
happens in month 170 of a 180-month contract, seller may be able
to evict buyer anyway and leave buyer owning nothing even after
spending thousands of dollars for payments.
Seller
financing -- Buyer buys $100,000 home by taking out an
$80,000 bank loan, putting $5,000 down and getting seller to "carryback"
a $15,000 second mortgage. Buyer makes payments on the first loan
to the bank and the second loan to the seller. Seller loan usually
has higher rate, shorter term and a potential balloon payment.
Benefits:
• Helps buyer get into a home with a small down
payment.
• Helps buyers with bad credit borrow more since
a private seller can give whatever terms he wants to a buyer.
For example, in our example the buyer's credit was only good enough
to borrow at 80 percent loan-to-value from a mortgage company
($80,000 on a $100,000 home), but he could still buy by getting
a separate loan for $15,000 from the seller, who isn't bound by
loan-to-value restrictions.
Drawbacks:
• Can leave a borrower overextended and the seller
can foreclose just like any other lender if the buyer screws up.
• Seller loan can have onerous interest rate and
terms that buyers may not realize they can't handle until it's
too late.
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