Why Don’t We Hear More About Creative Financing? The largest majority of residential real estate financing is provided to home buyers by traditional mortgage lenders through traditional channels. However, there are multiple alternatives to the traditional mortgage that are unknown to most borrowers, and some of these alternatives present potentially greater benefits. The reason for the lack of popularity of such options is they have miniscule or even non-existent compensation for mortgage brokers. Since brokers account for the largest majority of loan originations, these agencies and their employees will obviously steer borrowers toward options that provide better commission.
The Pros – However, for the borrower with the time and motivation to investigate alternative funding methods for real estate purchase, there exists a wealth of information and resources that can lead to property acquisition without the need for a traditional bank loan. Some of the positive aspects of such programs are lower overall costs, less stringent documentation requirements, and potentially significant leverage opportunity. Some of the potential risks associated with such alternative methods include a lack of contract guarantees, inability to capitalize on market fluctuations, time pressure, and the need for reliance on multiple individuals and/or organizations.
The Cons – For the inexperienced real estate investor or home buyer, the use of such alternative financing techniques is usually not recommended simply because of the dramatic risks and potential problems. Home buyers are usually best suited to mortgage loans with predictable and fixed payments, and the use of unorthodox acquisition techniques presents a plethora of complications that could threaten the home owner’s ability to retain possession of the property.
The majority of alternative financing solutions are utilized by professional and experienced real estate investors whose knowledge of such methods includes enough a comprehensive understanding of the worst case scenario. Only those investors who are sophisticated enough and have large enough financial reserves to handle any potential problems should consider the use of techniques outside the traditional lending channels.