When some people say "creative finance" they mean "mortgage fraud". You do it and I catch you and you pay. When I say "creative finance" I mean getting financing by thinking outside of the box but within the law. To help you get focused let's first give some examples of mortgage fraud that some people would class, wrongly, as creative finance:
1. Making a false statement on your mortgage application. This would include saying you occupy or intend to occupy the property as your primary. It would also include overstating your income, assets or employment. A very common piece of mortgage fraud is for an investor to say they receive $XXXX in rent every month when in actuality they receive $XXZZ per month.
2. Providing false income documents. These are very easy to disprove today but people still try them. They think because they go online and buy them from someone online there is some magic way to make them harder to detect. Uhm wrong.
3. Providing false tax documents. Yes we actually got a set of 1040's that were completely falisified. When the Loan Officer asked the borrower to sign a 4506T she asked to speak with me. When I asked her if it would be a problem she said, "Well, yeah." So she left and I sent her file to Agent Law at the Atlanta Field Office.
4. Borrowing the down payment from some other source and indicating it has not been borrowed. Which leads us to the correct use of borrowed down payment.
One great form of creative financing is to borrow your down payment from a friend, family member, your retirement account or any other source. If the money is borrowed there will need to be a letter explaining how it is to be repaid. If you borrow it from a family member they can ask for repayment however including "when the propery is finally sold or refinanced" or "never, it is a gift". The latter is what is called a "gift letter".
Most people falsely believe than you cannot borrow your down payment when in fact you can borrow your down payment. The catch comes when adding the repayment to your debt-to-income (DTI) ratio. If there is no repayment required or repayment is required when you sell or refinance then it does not affect your debt-to-income ratio. If you borrow from your retirement account and your payments back to your account are, for example, $100 per month then that 100 must be added to your debt. So long as your DTI still fits into the guidelines of the loan you will still get your approval.
Another from of creative financing I am seeing today includes trading in your current house. Many builders are accepting trade-ins and allowing a portion of the equity to offset the purchase price. A builder friend/client in my area recently accepted the equity of a home as a trade in and the balance in cash. The builder ended up with a lower monthly payment ona vacant home and sold one with a higher monthly payment (his construction loan) and claimed a sale at nearly full retail.
Government housing grants and down payment programs. While seller funded DPA has been attacked and at least dealt a temporary defeat other less regulated forms of DPA still exist. Talk with your local mortgage broker (not bank or direct lender but broker) about your options.
Quit claim transfer. Although FNMA and FHLMC demanded an end to what they call "wrap around" mortgages or "subject to" deals the most important thing to them today is to get repaid. While the "could" call the not due through the process of activating the Due On Sale Clause (often referred to in error as the acceleration clause) it is highly unlikely they will do so in the current financial environment. Contact a local real estate attorney about how to structure these.
Seller financing. If the seller has the ability to offer true financing which means the property is titled in your name as the mortgagee and the seller becomes the mortgagor then you are doing a true seller finance. Many builders and big volume investors are in the position to do this today.
Family loan. If you are from a large family or have a family member with the means they may be able to purchase the property for cash (at a fantastic deal I may add) and let you repay them on terms just like a bank or lender would do.
Rent to own/Lease to own. I always recommend having a reputable real estate attorney look over the terms of the lease with you to make sure you are getting what you think. Unfortunately a trick of many investors is to wrap you up so tightly into a lease with an option to purchase that you lose your deposit and your tenancy at the end of the first term.
Why did I say call a broker instead of a bank or lender? Believe it or not in many states the broker is more regulated than the bank or lender. In most states, for example, lenders and banks can get a "pass" for being a federally chartered institution and their employees, too, are exempted. Most important to you at the borrower level is that once a lender or bank has said "no" that's the end of the line. Go to another lender or banker and start all over. With a broker the switch to a different investor can be seamless. There is also a false belief that all brokers cost more than all banks or lenders because brokers are "middle men". There is no basis in truth and a study of over 1,000,000 closed loans bears this out.
Whatever you do, shop. If your agent has recommended only one lender find the other two on your own. But do your homework and become an educated borrower. Many national advertisers are well known in the industry for bait and switch tactics. Read this recent post for a little insight there.
There are ways other than calling a broker, bank or lender to get financing that are ethical and legal. Stick to the law and ethics and you won't have to wonder who is calling or knocking on your door.
See you at the polls in November. I dare you to vote for inexperience in a time like this.
THE OPINIONS IN THIS COMMENTARY ARE STRICTLY KEN COOK's PERSONAL OPINION AND NOT REFLECTIVE ON ACTIVE RAIN, NOVATION MORTGAGE, or ANY SPONSOR OF THIS WEBSITE.
EDUCATION BEATS LEGISLATION EVERY TIME. Get your clients, friends and family members to a LENDER RUN home mortgage seminar as soon as possible.
Copyright©2008 Ken Cook. Georgia and Florida real estate investment loans, FHASecure and FHA Home Loans, nationwide commercial hard money and small business loans, non-recourse loans for real estate investors
Novation Mortgage, 2501 E Piedmont Road, Suite 201, Marietta, GA 30062 Georgia Residential Mortgage Licensee 20014. Florida Mortgage Broker Business MBB 0703760 FHA Lender - Equal Housing Lender
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