A real estate agent whose client doesn’t have the best credit—or an appraiser who wants to facilitate the transaction if the appraisal comes in low—can present the prospective home-buyer with various creative ways to finance the purchase. “Creative lending” might include any of several innovative products and services. Unconventional methods such as crowdfunding might also bear consideration.
Another concept that’s demanding more attention lately is Shariá lending. Islamic principles forbid the lending of money at interest, but several “workarounds” are available to allow a devout Muslim to finance a home purchase.
When homebuyers have trouble getting a loan they can look to creative financing
Many homebuyers have trouble getting a loan if their net worth is low, even if their credit score is adequate. Many live in remote areas where access to mortgage financing is difficult. Jumbo loans come into play more often these days, as home prices creep back up.
Making the down payment is often a challenge, especially for first-time buyers. Here, too, help is available. A few companies offer down payment assistance in exchange for an equity share of the home’s value when it’s sold.
Michael Micheletti, director of corporate communications at Unison, a San Francisco-based funder of home purchases, explains that the Unison HomeBuyer Program assists homebuyers by providing part of a 20 percent down payment, across all price points.
“This is not a government program or subsidized assistance,” he says. “Unison is a private real estate investment company that invests in homes alongside buyers. The cash we provide is not a loan but rather an investment in the home. We don’t charge interest, and we don’t receive monthly payments until the owners decide to sell the home, up to 30 years later.”
In a typical transaction, Micheletti says, Unison shares a 20 percent down payment 50/50, while the buyer obtains an 80 percent mortgage loan. The owner then enjoys all the benefits of ownership (occupancy and tax benefits) and assumes the obligations (monthly mortgage payments, property taxes, property insurance, and maintenance).
When the owner sells the home, Unison receives an amount equal to its original investment plus or minus a share of the change in the value of the home—and does not share in additional equity created by improving the home. Unison products are available in combination with conforming, super conforming, and jumbo loans.
“For a real estate agent and their clients, the introduction of Unison HomeBuyer is a game changer. Homebuyers can increase their purchasing power overnight, so they can buy the home they want, today, with no interest or monthly payments on Unison’s down payment investment. They’ll be able to purchase a home without the additional expense of mortgage insurance and can qualify for the mortgage more easily.”
Other types of creative financing that is available
Dan Hanson, chief production officer at loanDepot, a lender headquartered in Foothill Ranch, California, says his company specializes in providing loans to buyers who have adequate credit but who for various reasons can’t get a conventional bank loan.
“Banks tend to lend to people who have other assets, so they go for higher-net-worth customers; thus many people have limited access to mortgage financing,” he says. “We reach into communities where banks might not have locations or don’t choose to lend. We work with first-time homebuyers; we offer a range of products, from FHA financing to jumbo loans. Anything you can get from a bank, you can get from us.
"We have proprietary products because we can fund our own loans. Because of low inventory in some markets, prices keep edging up, and more people have to take jumbo loans even for a first home purchase, so we’re coming out with our own jumbo loan adjustable-rate mortgage, Jumbo Advantage, that we finance ourselves.”
The vast majority of loanDepot referrals come from real estate agents and homebuilders, Hanson says.
“We can also help you finance renovation loans, rolling them into your home mortgage so you can add that third bedroom,” he adds. “We’ve done many loans for veterans who need their house adjusted because of disabilities they’ve suffered.
“We also offer an interest-only, fully amortized, 40-year loan, in which you pay only interest for the first 10 years, then roll into a 30-year fixed-rate mortgage. This product lets you ‘buy up’ a little when inventory is low and you finally find just what you want in the neighborhood you want.”
Interest-only loans are often useful to buyers who intend to renovate a property and sell quickly at a profit. Various types of financing by the seller can be arranged. Peer-to-peer lending is another option: via platforms such as prosper.com, individuals can invest in loans to other individuals.
This might be an option for getting help with a down payment, although it might be difficult to finance a home mortgage in this way. A co-buying arrangement might involve several family members or friends making a joint home purchase: a particularly useful idea if the home is a duplex or has two master suites.
Shariá financing: Methods that don’t violate Islamic law
Devout Muslims will often look for Shariá financing. Methods that don’t violate Islamic law include Ijara, Musharaka, and Murabaha.
Ijara is a lease-to-own plan in which the bank purchases the property, leases it to the tenant, then transfers ownership to the tenant at the end of the lease term—the monthly payment having consisted of a rent portion and a purchase portion. Down payments on Ijara contracts tend to be high.
Musharaka involves buying a property jointly with the loan provider and paying rent on the provider’s portion of the payment while buying more shares of the payment from the provider—with the shares based on the purchase price, not the current market value.
In a Murabaha plan, the bank buys the property, then re-sells it at a profit, with the purchaser paying that higher price in installments, at no interest, over a fixed term. In this way, the bank makes a profit through rent or resale (which is permissible), rather than by charging interest on a loan (which is not). Down payments for Murabaha contracts may be as low as 5 percent in certain states.
Shariá-compliant financing options are often hard to find in the United States, but more lenders are starting to offer such products.
What's your experience?
Do you have experience appraising properties for individuals who have used any of the creative lending options included in this article? What has your experience been? Let us know in the comments below. We'd love to hear from you!
About the author
Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His by-line has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at email@example.com.