Alternative Financing, Pros & Cons

Alternative financing is any loan that does not use the services of a lender, broker, or bank in the transfer of a home.  Alt. Financing can create options for both buyer and seller where before there were none.   If you are hamstrung as a buyer and looking for creative ways to buy the house you are in love with an alternative financing strategy may be the best road for you.  But it is important not to jump in without looking first.  There are benefits as well as risks involved.  Know both before deciding upon a course of action. 

Pros

The biggest benefit of alternative financing is that it allows you to get into a home with little or no money down.   If there is a gap between what you have saved and what a lender will finance, a seller may be willing to finance a larger percentage, or willing to finance a second to cover the gap.  This opens up your prospects when shopping and allows you to finance more of a home.

Another benefit is that it can simplify the transaction.  You make a down payment and the seller provides a contract or a mortgage.  The property is the collateral, and the seller files and records a lien so that they can take over the property if you default on the mortgage.  There is no need for a lender and all of the verifications that a lender requires.  While a cautious seller will most probably want to verify certain things like credit and employment, he or she will not mind if the down payment comes from your mattress or is borrowed, or if you work for cash. 

Cons

The primary disadvantage of lease options, land contracts, and seller financing is that if you default on any of your payments to the seller you lose any money you may have paid, as well as the property.  If something should occur and you are not able to make your payments, and the seller is unwilling to accommodate you, you can lose everything you have invested.  With a lender-financed purchase, you at least have the recourse of a refinance or a sale to draw on or cash out any equity you may have built up in the time of your ownership.  However, many lenders now offer the ability to refinance land contracts if the transactions are recorded at the county courthouse.  If you are considering alternative financing, be sure to consult an attorney to ensure that you have

Another disadvantage is that they are harder to find.  Sellers are less motivated to consider alternative financing if there is a market hungry for their property.  While it may simplify things for you, it complicates the transaction for the buyer.  You will most likely have to look harder to find a seller willing to participate. 

Another disadvantage is that it opens up the possibility for overpaying for a property.  With a lender-financed property, the sale price must be equal to or less than the appraised value.  This is not a condition of alternative financing.  In a hot market, an impulse to buy might make it difficult to recoup your investment if you try to sell before the value of the home has appreciated considerably.  You may even find yourself selling at a loss.

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