- The Washington Times - Friday, July 13, 2001

The key to any real estate transaction is financing. If you can qualify for the loan and the risks are within the lender's limits, you're in.

Most potential buyers look at real estate and see only the traditional means of buying a home. Single-family house, town house or condo, in an established neighborhood with people just like them people with day jobs who make about as much money as they do (otherwise, they couldn't be in the same neighborhood, right?) Not necessarily.

Creative financing is more than just a phrase in the real estate vernacular. It really does exist. A lot of it exists through government programs, such as the Department of Housing and Urban Development. Individual investors and even family members can cover your home purchase. If you can break out of the box that envelops traditional home financing, then the opportunities open up, as well.

HUD has several programs that enable buyers to purchase a house with graduated payment mortgage insurance. This program is much like a conventional 2-1 buy-down program. The program still relies on the Federal Housing Administration borrower limitations, which allows a somewhat higher-risk purchaser to buy a house.

The graduated payment mortgage program allows a buyer to purchase a house with a lower than normal interest rate but then raises the interest rate each year for the first few years, thus enabling the buyer to ease into the higher loan amount. Referred to as Section 245 loans, the program has five plans for home buyers. Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first five years of the loan. The other two plans permit payments to increase 2 percent and 3 percent annually in 10 years. Starting at the sixth year of the five-year plans and the 11th year of the 10-year plans, payments will stay the same for the remaining term of the mortgage. The greater the rate of increase and the longer the period of increase, the lower the mortgage payments in the early years.

Another HUD program comes under Section 223(e), which provides mortgage insurance for a home or project that may be otherwise difficult to finance because it is in an older, declining urban area. The program also is open to sponsors of multifamily housing located in older, declining urban areas.

Keep in mind that what HUD is offering is mortgage insurance to lenders who will make loans such as the ones described above. HUD does not originate loans but protects lenders from possible default.

HUD has several little-known, yet vibrant programs to help potential buyers purchase a home of their own. The key to these insurance programs is that it lowers the down payment and other stringent requirements to make homeownership easier for low- and moderate-income borrowers.

If you would like to begin investing in real estate, talk with your banker about HUD's Section 207 mortgage insurance. This program may be used for new construction, repair or rehabilitation, or manufactured home parks. To be eligible, the properties must consist of five or more units of detached, semidetached, walkup or elevator-style rental housing. Generally, a project is eligible for project mortgage insurance if the sponsors can demonstrate that there is a definite market demand, that the project is economically self-sufficient and that project financing is secure.

One final note on HUD-based programs, and that is the organization's 203k program, where a purchaser can buy a fixer-upper home and get a loan that also covers the refurbishing of the property as well as its original purchase. (This program even allows the purchase of a lot and moving another home onto it.)

For information about any of these programs, go to the Web site (www.hud.gov) and click on the "Home Improvement" or "Other Funds" sections.

If you really want to break out of the box, consider seller financing in a hot seller's market. If your marketplace is experiencing appreciating prices, some homeowners may consider financing their home themselves, if they are looking for a regular cash flow.

It works like this: Buyer Jones agrees to purchase the house for $150,000 with a $7,500 down payment (5 percent). Seller Smith provides a note for $142,500 at 8 percent, and buyer Jones sends payments to seller Smith, who then continues to make payments to his original lender, holding a note valued at $80,000. (This is not allowed under all loans. The seller must check for a "due-on-sale" clause in the original mortgage to see if the note is due upon sale of the property.)

Mr. Smith has wrapped this new loan around his personal loan. In essence, he's making money on the property each month, based on today's prices. (Consult with a real estate or mortgage professional before attempting this yourself we don't want anyone falling down and losing an eye at this point.)

It can be a bit complicated, but it's another way of financing that is a bit nontraditional, and it works for thousands of buyers and sellers in today's market.

Do you have a rich uncle or other relative who wants to make money on their money? You could consider having such a person finance the purchase of your next house instead of the traditional banking institutions. A good real estate attorney can help with the paperwork.

Real estate financing is the name of the game in home buying. Learn it and your options for ownership multiply.

M. Anthony Carr has written about real estate issues for more than 12 years. Send questions and comments by e-mail ([email protected]).

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