Now is a good time to buy the home you have always dreamed of on Smith Mountain Lake. But that kind of real estate purchase may take a little planning. This article by Kenyon Blunt at Lake Home Tips might have the needed input for financing that dream.
You may be waiting to buy your lake home; waiting for the kids to go off to college, waiting for that promotion, or, dare I say, waiting for Aunt Martha to die. Sometimes great opportunities are lost while we’re waiting for perfect conditions.
If you’ve struck out with conventional financing or if you’re just waiting for something to happen, using one of these eight techniques may be just what you need to buy that lake home. Most of us in the pre-retirement age group want to sock away as much as possible in our IRAs. This article will show you eight ways, including using your IRA, that aren’t used very often to finance second home purchases but are still worth considering in special circumstances
Here are eight financing options you should consider:
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- Real Estate IRAs. You may not realize it but your IRA can also invest in real estate. Many banks don’t like to administer them because they must act as an owner which means they have to pay the taxes, collect rents, etc. You can’t use an IRA to buy your residence; it has to be an investment property, however, you can have the IRA turn the lake home over to you at retirement at its current market value. As you might expect, there are many guidelines to this program so you probably want to investigate it thoroughly.
- Mortgage Assumption. If the lake home you’re looking at already has a mortgage in place, see if you can assume it. Usually, assumptions require little expense and sometimes are at below-market rates. FHA, VA, and almost all adjustable-rate mortgages are assumable.
- Seller Financing. Having the seller finance your purchase is very attractive to both of you. Even if you can qualify for a bank loan, you should still look into seller financing because; 1) the sellers will often take an interest rate less than the bank, 2) you can skip a lot of closing fees, 3) it has less paperwork and can generally close faster and 4) you can create terms and conditions that fit your budget.
- Lease with an Option to Buy. If you’re unsure whether you’ll like living at the lake or if you don’t know how much you’ll be able to use your lake home, leasing with an option to buy may be just the ticket. Renting for a year is very common with newcomers to the lake. It gives you time to become familiar with the area while still using a portion of your lease payment for equity. The seller and the tenant should make sure that both the purchase terms and the rental terms are spelled out in the agreement.
- Equity Sharing. This technique is often used for investment properties. It’s when a cash-poor buyer hooks up with an investor to front the down payment on the lake home. The buyer lives in the lake home, makes the payments, and maintains the property. The two share in the appreciation of the home over some pre-determined amount of time. See my article on investing with friends and family for some of the pitfalls of this type of arrangement.
- VA Loans. This strategy is often overlooked by veterans because they know that VA loans are only available at primary residences. But what’s the definition of a primary residence? It’s the place you spend most of the year. So, let’s say you buy your lake home and live in it for seven months of the year, it would qualify for VA financing.
- Reverse Annuity Mortgages. If you’re a senior (age 60) with equity built up in your primary residence, you can use it to finance a lake home by using a reverse annuity mortgage. The lender will advance you money in payments that you can use to pay for your lake home. The mortgage is paid back at the death of you and your spouse and any money that’s left over goes to your heirs. You can contact the American Association of Retired Persons (AARP) for more information.
- Stock Portfolio. Many investment firms like Merrill Lynch, Paine Webber, and Morgan Stanley now let you use your stock portfolio as collateral for property investments. They will generally lend you two to three times the amount of your portfolio. Talk to your financial advisor for more details.
If you’ve run into a brick wall trying conventional financing, consider one of these eight alternative methods of financing. Depending on your circumstances and how you plan to use your lake home, your waiting may be over.
About the Author:
Kenyon Blunt is the publisher of “Lake Home Tips.”
