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Traditional Creative Financing

What Is "Creative Financing?"

Creative Financing is where the seller (not a bank) provides the financing for the purchase of the property. It is the use of one of several methods that enable a seller to dispose of the property quickly without requiring the buyer to qualify for and obtain financing at a lending institution. There are several advantages:

• Because the buyer need not be "qualified" to bank standards, it makes available to the seller a much larger number of buyers. 

• Because the seller is offering "terms" rather than demanding all-cash, there is a greater demand for the property and the seller is able to require a higher price. 

• Because financial institutions are not involved, the transaction can be concluded almost instantly.

Traditional Creative Financing Methods

Creative financing traditionally takes one of these forms:

Loan Assumption: This is where the buyer steps into the seller’s shoes and takes over the existing loan. Except in the case of certain old FHA and VA loans, this option is no longer available unless the seller gets the lender’s approval and the buyer qualifies. A "subject to" assumption is where the buyer takes title but the seller remains liable to the lender.

Seller Carry-Back or All Inclusive Trust Deed (AITD): This is also known as a "wraparound" sale. This is where the seller deeds the house to the buyer and "carries-back" a single loan from the buyer in an amount that includes (or wraps around) existing financing. The seller continues to make the payments on the existing loan out of the payments s/he receives from the new owner. The loan to the seller’s original lender is still secured by the property.

Contract for Deed: This is also known as a land contract or installment sale. This is where the seller retains title to the property until all payments have been made by the owner-to-be. The loan to the seller’s original lender is still secured by the property and the seller still makes payments on the loan out of the installment payments received on the contract.

Lease-Purchase or Lease Option: This is where the seller leases the property and the tenant makes rental payments until it is time to purchase. In the first case the tenant is obliged to purchase. In the second case the tenant has the option to purchase. The loan to the seller’s original lender is still secured by the property and the seller still makes payments on the loan out of the rental payments received under the lease.

To these creative financing techniques should be added less desirable and more drastic attempts to relieve the stress of unwanted or no longer affordable real estate. These are:

Offer & Compromise (Mortgage Debt Relief or "Short Sale") or Deed-in-Lieu of Foreclosure: This is abandoning the property with the agreement of the bank.

Foreclosure: This is just "walking away" from the property and the bank.

Discover the dangers of traditional creative financing in the Index to these Background Reports.

E-Mail Tony

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Palm Springs Desert Area Homes, Condos & Real Estate are to be found in the Coachella Valley cities of Palm Springs, Palm Desert, Cathedral City, Rancho Mirage, Indian Wells, Bermuda Dunes, La Quinta, Desert Hot Springs, Thousand Palms and Indio. These are the cities that form the Greater Palm Springs Desert Area and are home to some of the finest living and the best resort real estate in the world. If you want to sell or buy homes, condos, or real estate anywhere in the Coachella Valley,  this site will provide the little known information you need and the solutions you seek.