Lease With Option

In a lease with an option, you lease the home from the seller for specified period (12 months or 24 months for example) at an agreed-upon amount.  At the signing of the agreement, you make a down payment of a percentage of the eventual purchase price (typically 3% -5%).  Then, the lessor sets aside a portion of that monthly lease into an account that will be used as a down payment at the end of the lease term.  At the end of the lease term, you buy the home with the increased down payment (your initial down payment plus the additional amount that you have saved over the lease term) and a mortgage from a loan provider.   This may be a good option for someone short of down payment funds, or someone who could use a year to improve their credit in order to qualify for a mortgage.

Contract For A Deed Or “Land Contract”

In a contract for a deed, often referred to as a land contract, you arrange a contract with the seller to make payments directly to him or her, or an escrow agent who will hold the deed to the property.  The seller typically charges you interest at the current mortgage rate.  The deed remains the property of the seller until you have completed making payments for the term originally agreed upon (10 years, 15 yrs, 30 yrs), at which point the deed is transferred to you.  At no point is a lender, broker, or bank ever involved.  This may be a good option for someone with a credit issue that will take years to resolve, or who would like to avoid the closing costs associated with loan providers.  Sellers may be reluctant to engage in a land contract if they need the proceeds of the sale up front in order to purchase a new home.  The risk for you as the buyer is that if you default on the payment the seller evicts you, retains the property, and pockets all of what you have paid thus far. 

Seller First

With a seller first, you put down a percentage, and finance the remainder with the seller.  Typically with these loans, the seller will ask for a sizable down payment to ensure your good faith.  It is very similar to financing with a lender in all respects but for the qualification, verification, and approval process.  With seller financing, this side of the loan transaction is slimmer, simpler, or even non-existent, according to the seller’s wishes.

Seller Second

In the situation of a seller second, you qualify for and obtain a mortgage for a lender, and the seller provides the money to cover the remaining percent of the sales price.  For example, if the sales price is $100,000 and you are approved for a mortgage for only $80,000, the seller can provide a loan for the remaining 20% or $20,000.  You then make payments to the lender for the 80%, as well as the seller for the 20%.  The seller is free to charge interest on the loan, and require any terms he or she likes.  This is a risky position for the seller as they are second position lien holders on the property.  If you default on your payments, the lender covers their costs first, and the seller gets whatever is left, if any.

Assumption

In an assumption, you take over, or “assume” the mortgage that the seller originally financed.  Assumable loans are those on which existing borrowers can transfer their obligations to qualified house purchasers. However, most conventional loans today are not assumable without the loan provider’s permission. These carry "due on sale" clauses, which require that the mortgage be repaid in full if the property is sold. Due-on-sale clauses prohibit a home purchaser from assuming a seller’s existing mortgage without the lender’s permission. Currently, only FHA and VA loans are assumable.

Wrap-Around

Wrap-arounds are a rare and fairly complicated loan in which a seller will sell you the home and keep the original mortgage while financing a new loan with you.  He or she will accept payments from you on your new loan while still making payments on the original loan.  A wrap-around mortgage is much like a seller second except in this situation the seller’s loan on the home is not paid off.  A wrap-around is attractive to sellers because they can make more leveraging a higher rate on the new mortgage than their original loan.  Said simply, it is borrowing low to lend high.  In general, only assumable loans are wrappable.

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