Creative Financing Options for Homebuyers

At Hawkins Moore and Company, we understand that not every buyer fits into a traditional mortgage model. Creative financing options can open the door to homeownership for buyers facing unique financial situations. Below is a breakdown of several non-traditional mortgage solutions, along with their advantages and risks.

Shared Appreciation vs. Shared Equity Mortgages

Shared Appreciation Mortgage (SAM):
Offers a below-market interest rate in exchange for the lender receiving a percentage—typically 30% to 50%—of the property’s appreciation upon sale. These were introduced in the early 1980s when interest rates were high, but never gained widespread popularity due to the rise of adjustable-rate mortgages.

Shared Equity Mortgage:
Involves an investor covering all or part of the down payment in exchange for partial ownership. While less common in slower markets, shared equity is gaining traction in high-priced areas. Tenants-in-common (TIC) partnerships are an example. These arrangements often require complex underwriting and legal agreements, so it’s advisable to involve an attorney.

Biweekly Mortgages

With a biweekly mortgage, monthly payments are split in half and paid every two weeks. This results in 26 half-payments—or the equivalent of 13 full monthly payments—each year. The extra payment accelerates loan payoff and reduces total interest paid, often shortening a 30-year loan to around 22–25 years.

Growing Equity Mortgages (GEMs)

GEMs are fixed-rate loans with payments that increase annually, typically by at least 3%. Benefits include:

• Shorter loan terms (usually 15 to 20 years)
• Reduced total interest payments
• Faster equity accumulation

These loans often come with below-market interest rates to make them more appealing.

Reverse Mortgages

A reverse mortgage allows homeowners aged 62 or older to convert home equity into cash. Unlike traditional loans, the lender pays the homeowner, who retains full ownership of the property. The funds are tax-free and generally do not affect Social Security or Medicare, though they may impact eligibility for Medicaid.

Repayment is deferred until the homeowner sells the property, moves out, or passes away. Many seniors use reverse mortgages to cover medical bills, home repairs, or daily expenses.

Subprime Loans (B, C, and D Paper)

Subprime loans are designed for borrowers who do not qualify for conventional loans due to credit issues, past bankruptcies, or high debt-to-income ratios. These loans carry higher interest rates and fees and are categorized by credit grade (B through D). Due to the subprime mortgage crisis, many lenders have tightened eligibility and increased rates on these products.

Hybrid Loans

Also known as fixed-period adjustable-rate mortgages (ARMs), hybrid loans offer a fixed interest rate for an initial period—commonly 3, 5, 7, or 10 years—before converting to a variable rate.

Pros:

• Lower initial rates than traditional fixed mortgages
• Ability to afford a higher-priced home initially

Cons:

• Rates can increase significantly after the fixed period ends
• Terms and fees can vary widely

Review terms carefully, including any prepayment penalties.

Jumbo Loans

Loans above the conforming loan limit (currently $333,700 for a single-family home) are considered jumbo loans. Because these carry more risk for lenders, they come with slightly higher interest rates.

Veterans in high-cost areas may use VA loans up to the jumbo threshold, provided they meet equity or down payment requirements on the amount above $240,000.

Balloon Mortgages

A balloon mortgage offers low monthly payments with a large lump-sum payment due at the end of the loan term (e.g., 5, 7, or 10 years). This loan is ideal for buyers who plan to move or refinance before the balloon payment comes due. However, if the property is not sold or refinanced, the borrower must repay the remaining balance in full.

Bridge Loans

Bridge loans are short-term loans that use equity in your current home to help finance the purchase of a new home before your current one sells. These loans are typically paid off once your old home sells.

Key considerations:

• High interest rates and points
• May require a lien on your current property
• Often used only when a buyer is already under contract

Lease Options

A lease option is a rental agreement that gives the tenant the right (but not the obligation) to purchase the home later. These are useful for buyers working on their credit or saving for a down payment. A portion of the rent is often credited toward the future purchase.

Always have a lease-option agreement reviewed by an attorney to ensure terms are clear and enforceable.

Two-Step Mortgages

Also known as 5/25 or 7/23 loans, these start with a fixed interest rate for the initial 5 or 7 years and then adjust or convert to a different rate structure for the remaining term. The structure may shift to either a fixed rate or an adjustable rate, depending on whether the loan is convertible.

These offer lower initial rates than 30-year fixed loans but carry more risk than traditional fixed-rate mortgages.

Wraparound Loans

In a wraparound loan, a buyer takes out a secondary loan that “wraps” around the existing mortgage. The buyer pays the seller, who continues making payments on the original loan. This arrangement can allow buyers to purchase without qualifying for a new loan, but it comes with risk and complexity.

Important:

• Not allowed if the existing loan includes a “due on sale” clause
• Best handled with legal counsel due to the layered structure

Assumable Mortgages

An assumable mortgage allows a buyer to take over the seller’s existing mortgage. These are rare but can be attractive when the original mortgage has a lower interest rate than what’s currently available.

Keep in mind:

• May include an assumption fee
• Closing costs are often lower
• Sellers may remain liable unless the assumption is formally approved by the lender

Seller Financing

Also called a purchase money mortgage, this involves the seller “loaning” money to the buyer directly. The buyer signs a promissory note and makes monthly payments to the seller instead of a bank.

Terms are negotiable, but often include:

• Higher interest rates than conventional loans
• Shorter loan terms (typically 5–15 years)
• Significant down payment required