What is Creative Finance?
You may have heard of "creative finance", but what is it?!
Creative finance refers to alternative methods of financing real estate transactions that deviate from traditional, institutional methods that most realtors and lenders will steer you toward. House hacking, arbitrage, and lease-to-own may be other terms you’ve heard, but we’ll cover subject to, seller finance, and hybrid methods below.
Subject To:
This method of financing involves the buyer taking over payments for the existing mortgage on a property. The buyer does not actually take out a new loan, but instead agrees to make the payments on the existing mortgage "subject to" the terms of the original loan. This can allow the buyer to purchase a property with minimal cash out of pocket, but requires a skilled party to engineer a deal that protects all parties and execute these transactions. Though it’s rarely discussed, it’s not new! Check out the HUD-1 lines 203 and 503 that specify amounts taken over “subject to existing loans”.
Examples:
Civil Rights: Prior to civil rights laws in the 60s, women would take over “non-qualifying” loans.
Divorce: Have you ever heard of a divorce resulting in one party keeping the home and taking over payments, even when they’re not on the original loan?
Death: How about the death of a spouse or family member in which the loan continues to be paid? These are both examples of taking over loans “subject to”.
Seller Finance:
This method of financing is one of the more common creative finance transactions that is known. It involves the seller acting as the lender and providing a loan to the buyer to purchase the property. This can be done through a traditional mortgage, a land contract, or a lease option. This type of financing can be beneficial for buyers who are unable to qualify for traditional loans, but it also comes with certain risks for the seller that can be mitigated with some additional notarized security instruments.
Hybrid Real Estate Deals:
This is a combination of multiple creative finance techniques and traditional financing techniques. It can be a new loan with seller carry back terms. It can be a combination of “subject to” and seller finance. Or even a Lease Option to Purchase and Subject To. This can help to mitigate the risks associated with either method alone, and can help to structure a deal that is beneficial for all parties.
While it may be simply stated above, it’s worth noting that these methods of creative finance can be complex and come with their own set of legal, financial, and regulatory considerations. It's important for both buyers and sellers to understand the pros and cons and to seek professional advice before entering into any creative finance deal. Want to know more? Ask away!
