Many homebuyers and investors have been reeling about how difficult it is to get credit from conventional lenders. Indeed, banks have tightened credit to the point that their lending standards today are most stringent in over fifteen years. With scarce and relatively expensive credit from conventional lenders, several viable lending alternatives have emerged. Here are three possibilities to secure financing for your home purchase or investment:
1. Small lending institutions, such as savings and loan institutions, credit unions and small regional banks, have not been bruised as much by the current credit losses as have been large banks that securitize their loans. These small lenders usually keep their loans on their own balance sheet and therefore scrutinize credit risk much more than large lenders. The small lenders are open to negotiate their own terms with prospective borrowers. They are particularly eager to offer financing to those borrowers who can provide good collateral and prove stable income flows.
2. Private lenders have been fair substitutes for conventional lending sources especially at times when money gets tight. They are keen on lending when credit from traditional sources dries up because demand for their money increases and profiles of borrowers usually improve compared to those when money is readily available from traditional lenders. Advantages of private funding include flexibility and simplicity of lending operations, which do not involve cumbersome procedures associated with standard loan approvals. What’s more, these lenders are also more willing to refinance their loans after loan expiration. Still, given the heightened risk of their lending, private lenders usually require interest rates and commissions that are higher than those assessed by traditional financing sources. The rates private lenders charge usually range between 9 percent and 15 percent per annum. Private lenders may be located through personal contacts, investment club networks, real estate clubs, and newspaper classifieds. Interestingly, advertisements from these types of lenders have been increasing on various public forums and job boards.
3. Seller carry-back financing is another viable alternative to conventional financing. This type of financing may be easier to obtain in the current, “buyer’s” market in which a seller is prompted to offer money as an incentive to get the sales completed. The lending terms on seller carry-back financing are similar to those of private lenders, with interest rates usually ranging between 9 percent and 15 percent per annum. The actual rate depends on the factors such as the type of mortgages (adjustable or fixed), amount of down payment, borrowers’ credit history, and the loan’s maturity. Seller carry-back financing usually covers up to 20% of home value, but some lenders are willing to cover higher amounts.
These sources of real estate finance may serve as venues that provide funding for many home buyers and investors who currently either do not qualify for loans from traditional financing sources or who need to raise additional funds for their purchase. However, this does not mean that all potential borrowers will be able to obtain funding from these lenders. Creditworthiness of each borrower—or borrowers’ capacity to repay the loan—still plays a dominant role in the lenders’ decisions whether or not to lend money.