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Buying A Home Without A Mortgage

Buying A Home Without A Mortgage

Buying A Home Without A Mortgage

The use of a mortgage to buy a home is what is used by a majority of homebuyers.  Around 70% of homebuyers are using a mortgage when buying a home.  There are other means with which to buy a home and this article looks at some of the alternatives and what to look out for when buying a home without a mortgage.

Buy a Home With Cash

One of the most commonly used means for buying a home and that does not involve taking out a mortgage is buying a home with cash.  Many investors purchase homes with cash with the goal of fixing up the home and selling it for a profit or fixing it up, getting the home rented out and then getting a mortgage to cash out their equity.

There are also home buyers buying a home to live in with cash.  These buyers may be getting their cash from savings, borrowing from retirement accounts, borrowing based on equity in stocks or other real estate, gifts from family members and other sources.  Especially in a market where the mortgage rates are high, buying a home with cash to get a discount on the purchase price may be a good option for those who have access to cash.  Once purchased with cash there are plenty of mortgage lenders who are willing to give a mortgage to that homeowner so they can get some of their cash out of the equity they have.protect

While cash purchases of homes allow a home buyer to close quicker than a mortgage purchase would allow that does not mean a cash buyer should rush things.  Instead the cash buyer should seek to use all available contingencies to make sure that not only is the home in good condition but also that the value reflects what they will be paying at the closing table.  A home inspection is a must and the home appraisal would be a good option to make sure the home buyer is not overspending on the home.  Other contingencies such as being able to obtain insurance and being able to get clean title are also important and should be written into any purchase contract for a home.

Lease with Purchase Option

Some investors who have a home for rent may also consider offering a purchase option whereby the renter builds up equity in the home through each monthly lease payment that can be later used to buy the home outright.  The purchase price can be specified in the lease contract or can be determined at some time in the future based on market values.  With some short-term lease purchase option contracts the investor will state a price in the contract that they would be willing to sell the home to the renter for.  In other situations the lease contract may state that the purchase price will be based on a current appraisal, current market value or some other method of determining the current fair market value.

Both the lessor (the one leasing out the property) and the tenant should have their own attorney review the lease purchase agreement reviewed to make sure their best interests are represented.  With a lease with purchase option the property owner can still have a mortgage on the property and the due on sale clause should not be triggered by the lease purchase option as the primary action taking place is leasing of the home and the sale does not take place until later when the tenant decides they want to purchase the property.  Investors should have their mortgage documents reviewed by their attorney when having the lease purchase contract reviewed to make sure there are no conflicts that could cause the mortgage to be declared in default.

Land Contract

A land contract is basically seller financing to the buyer for the purchase of the property.  The buyer and the seller come to agreement on monthly payment terms, interest rate charged, as well as the term of the land contract.  Some land contracts provide for a fixed monthly payment for a certain number of years and then a balloon payment where the remaining balance is to be paid off.  The thought process behind the balloon payment is that after a certain amount of time the buyer will be able to get a regular mortgage for the property and pay off the balance of the land contract.

Buyers who may not have established credit or are unable to get a mortgage for whatever reason might opt for a land contract if the seller is willing to finance the purchase.  Sellers usually will require a large down payment as a condition for the land contract.  Anywhere from 10% or more might be required.  How much is put down, the monthly payment as well as the interest rate scalescharged are negotiated between the buyer and the seller.

Both the buyer and the seller should have their own attorney review the land contract document to make sure each side’s interests are being properly protected.  Buyers should always insist that the land contract be registered with the register of deeds, recorder’s office or other such office where real estate transactions are recorded.  This will protect the buyer by making sure any new lenders or other buyers know the current buyer has a land contract interest in the property.  Without registering the land contract the seller could potentially add more liens to the property or sell to someone else which would then require a court of law to settle.

Another concern both the buyer and the seller need to be aware of are terms in any mortgage on the property taken out by the seller.  Most traditional residential mortgages have a due on sale clause which requires the loan to be paid in full anytime the property title is transferred.  A land contract would be considered a transfer that could make the mortgage loan due in full immediately.  If the seller cannot pay of the mortgage the lender could foreclose on the property and the buyer as well as the seller would have to fight the matter in court.

Final Thoughts

Land contracts, cash purchases and lease options are different options available to buy a home.  Land contracts and lease options can be more complicated than a cash or mortgage purchase and it is important to consult with an attorney.  Real estate agents should have some experience to help buyers with the purchase of a home using any of the methods described in this article.

Additional Resources

  • Tips For Improving Your Chances of Getting a Mortgage Loan - Even with the increase in mortgage rates the process for a buyer to get a mortgage is the same.  That does not mean buyers cannot help improve their chance of getting the mortgage as this article explores.
  • Property Contingencies to be Aware of - Whether a home is being purchased with cash, a land contract or with a mortgage the buyer should understand the contingencies that are available to them and the timeframes involved.
  • What is a Lease Option? - Lease with an option to purchase provides an alternate means to buy a home.  Often times a mortgage is needed to exercise the option but does not have to be the case.

About the author: The above article “Buying A Home Without A Mortgage” was provided by Commercial Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.

Buying A Home Without A Mortgage

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