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Beyond the traditional mortgage: 6 creative ways to buy a home
March 9, 2018
It’s tough to find an affordable home these days. Maybe you don’t have the cash for a down payment and closing costs. Maybe your paycheck isn’t beefy enough to get you into most of the homes in your city. Maybe student loan debt is weighing you down.
Well, maybe it’s time to get a little more creative! A traditional mortgage isn’t the only game in town. There are some interesting government, private, and nonprofit options out there that make buying a home more affordable. Would you be willing to put community before equity? Or strap on a tool belt? How about buy at an auction? Or buy a share of a property?
Homebuyers are blazing all kinds of new trails these days, but let’s start with six alternative, yet at the same time tried-and-true, paths:
- Community land trusts
- Nonprofit and community developers
- Habitat for Humanity
- Cooperative housing
- Contract for deed
- Distressed properties (such as foreclosures)
1. Community land trusts
Nonprofit community land trusts (CLTs) make buying more affordable by selling you only the building. You get a long-term lease for the land.
This kind of ownership is a little complex, but it can get you into a nice home — and you’ll be part of a nationwide movement that’s helping communities to provide permanently affordable homes. A cluster of CLT homes can help stabilize a whole neighborhood.
The CLT approach becomes clear when you look at selling. Typically, the land trust will either buy the home back or help you find another low- to moderate-income buyer. You’ll pocket what you invested plus an inflation factor, but you can't resell on the open market. That way, investors or absentee landlords can’t swoop in and turn the property into an expensive rental or flip it for a profit.
To get a real flavor of CLT homeownership, spend some time with this National Community Land Trust Network video (40 minutes, but worth it if you're really interested in CLT's). Or start by contacting a local homeownership advisor, who can tell you if there are any CLTs in your area.
2. Nonprofit and community developers
Nonprofit and community developers often build or rehab apartments for rent, but many also help lower-income families become homeowners.
This category includes a range of groups that do affordable housing, economic development, and other community-building projects. Some of them are community development corporations, or CDCs. When it comes to homeownership, they might use sweat equity (your own unpaid work) or government funding to offset costs. A local homeownership advisor can tell you what opportunities might be available in your area.
3. Habitat for Humanity
Ready for some serious DIY? Habitat partners with households that are up for building or rehabbing their own home — with a Habitat work team’s help.
Habitat for Humanity is active in every state in America, not to mention nearly 70 other countries, and has helped millions of people since its founding in 1976. All that sweat equity and volunteer help will keep your costs down, of course, but Habitat homes are also affordable because they’re sold “at cost” and you pay little to no interest on the mortgage.
Can’t swing a hammer or stay calm around a table saw? Don’t worry: Habitat takes a broad view of “sweat equity.” It can include homeowner classes or volunteer work at a Habitat ReStore, for example. The local Habitat in Jackson County, Florida, awards an hour of sweat equity for every “A” a child earns in school. Imagine your kids' pride when they help buy the family home!
Interested? Candidates for homeownership are chosen at the local level, and income restrictions usually apply. Visit Habitat.org to find and contact your local Habitat.
4. Cooperative housing
Another way to make homebuying more affordable is to pool resources, and that’s what a housing cooperative lets you do.
Through the legal entity of a housing cooperative, or co-op, a group of people share ownership of one or more residential buildings. The shareholder-owners divide the mortgage, taxes, insurance, maintenance, and other expenses, and each owner is granted the right to occupy one unit.
Compared to condos, co-ops typically have lower financing and property tax costs, and lower transfer costs at the time of resale. Plus, it’s easier for them to take advantage of social investment and subsidies.
With a condo you have your own deed, but with a co-op, you’re buying a share of the co-op, not a piece of property. You take out a “share loan” instead of a mortgage, although it works very much like a mortgage. As with a condo, which has homeowners association (HOA) fees, you also need to budget for monthly fees that cover maintenance and other costs.
Co-ops are democracies. Larger ones usually rely on an elected board of directors to make decisions related to finances and upkeep. In small ones, all members might sit on the board. Some co-ops allow members to screen new members, so you, or your elected representatives, get to choose your neighbors. (A New York City cooperative famously rejected Madonna at the height of her fame.) On the other hand, there are often restrictions on pets, the number of people who can live in your unit, and renting out your unit.
Make sure you understand how a particular co-op works before you buy.
5. Contract for deed
If you aren’t qualified to buy but expect to be soon, a contract for deed gives you time to build your credit or your savings. But protect yourself.
Sometimes called a land contract, a contract for deed is an agreement to buy a home from a seller. In the meantime, the seller keeps the legal title and right to the property. You move in and start paying the seller directly, based on an amortized payment schedule. After whatever number of years you and the seller agree to, a balloon payment is due: the entire loan has to be paid in full, usually with a traditional mortgage loan.
Just to be clear: you’re not taking out a mortgage until the balloon payment is due. That’s both the advantage and the risk of this path to homeownership. You don’t have to qualify for a traditional mortgage, but you don’t have the legal protections of one either. Worst case scenario: you lose whatever you’ve paid. Plus, what if you still can’t qualify for a mortgage when the balloon payment comes due?
That said, this can be a good option under the right circumstances. Your safest bet might be to go through a reputable community agency that uses contract-for-deed arrangements to help low- and moderate-income buyers get into homes. It’s a good idea to consult a local homeownership advisor before pursuing a contract for deed. Protect yourself!
6. Distressed properties
Buying a home that’s in the middle of the foreclosure process can be complicated and even risky. But it can also be a great opportunity.
Are you priced out of your market? A distressed property might get you in, especially if you’re equipped to handle a fixer-upper. Just be sure to do your homework. It’s smart to hire a real estate attorney for these transactions, and if possible, to work with a specialized Realtor.
Short sales usually happen when a homeowner who's behind on the mortgage tries to sell for less than they owe, which can be better for them than a foreclosure auction. The name comes from the fact that the seller is "short" on what they need to pay off the loan.
Short-sale properties are often in better condition than foreclosed ones, partly because they're still occupied. On the other hand, the lender has to approve the offer and has the right to refuse the sale any time before closing, which could complicate things for you. The sale can drag out for months, so you’ll need patience.
This is what most people think of when they think foreclosure: a home sold at public auction. It’s the riskiest kind of distressed property to buy. Anyone can bid at these auctions, called sheriff’s sales or trustee sales. But what usually happens is the foreclosing lender bids the amount owed to them and wins, and later puts the home back on the market.
Definitely consult a real estate attorney if you’re interested in a foreclosed home. Here’s a quick look at the risks:
- Most foreclosed homes are sold “as is,” and many need extensive repairs
- Usually, the home can’t be inspected in advance, although you can bring an inspector to the sale
- Clear title is not guaranteed
- You’re required to pay cash on the spot
A real-estate-owned home (REO) went into foreclosure but didn’t sell at auction. It’s the safest kind of distressed home to buy. When a home doesn’t sell at auction, the lender will repossess it. Lenders often just want to get rid of these properties and will sell them at below market value. They might even offer buyers extra incentives, such as reduced closing costs.
Why is an REO a safer buy than a foreclosed property?
- The bank is required to pay off any liens, so you won’t have that potential issue hanging over your head.
- You can have the home professionally inspected before you buy, so you know what you’ll be getting into for repairs.
Reminder: Have you explored down payment assistance?
A lot of homebuyers don’t realize how much down payment assistance is available or think they won’t qualify for it. Start getting up to speed with our beginner’s guide to down payment assistance.
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Filed Under: For Homebuyers