Buying your first home can be exciting, but using lenders to finance your home buying can be regrettable in the long run. With most lenders imposing strict lending requirements for a conventional mortgage, self-employed, first-time home buyers and credit challenged individuals might experience difficulty securing a loan to finance their home purchase. Even when successful, the outcome can be unpalatable, particularly when you default on the repayment of that loan by failing to make your monthly mortgage payments in full and on time every single month. Lender-financed real estate purchases may come with benefits; however, the downsides can be expensive, limiting, and time-consuming. Are you planning to finance your real estate purchase? These five reasons will show you why using a lender to purchase properties may have some downsides worth considering as follows:
1. Monthly Mortgage Debt
Every lender’s goal is to make a profit. When acquiring a lender-financed home, meaning you get a loan from likely a financial institution like your conventional banks (wells fargo, bank of american, chase), bear in mind that lenders will demand a profitable return on their investment. They collect these funds by imposing many miscellaneous financing charges on your loan. Before funding your home purchase, you will sign an agreement for repayment, a promissory note, which makes you indebted to the lender for the next 30-40 years. So when you’re thinking of caring for your family, going on vacation, or acquiring the latest inventory, you are also thinking of your monthly mortgage debt.
When using a lender to finance your home buying, consider the possibility of the next financial crisis. Nobody dreams of losing their jobs, until the unexpected happens and they do lose their job which is usually their only stable and consistent monthly income source for the majority of Americans. A financial crisis might erupt just like we are experiencing in this ongoing coronavirus pandemic. An unexpected global financial crisis fueled by a pandemic will leave you with no option but to care for your family. You can fall behind on your mortgage payments in such situations and perhaps overleverage your credit cards with increased charges and cash advances. As a result, it increases your utilization rate on those credit cards which lowers your personal credit score, makes you less lendable, and lowers the amount of leverage in the form of loans and access to capital you can get. What do adverse situations like that co-create? It leaves your lender with no choice but to foreclose on your property.
3. No Profits
Financing your home buying with lender-funding can leave you with enormous debt and added stress, instead of profits. Since the mortgage loan is secured on your property as a lien, your priority would be to keep up with your monthly mortgage payments, usually prioritizing these payments over all your other monthly bills, when you should be profiting from your investment. Although the monthly repayment may seem reasonable, the repayment can last for years to come.
4. Limited Investing
Self-funding your home buying provides you with unlimited investing options, increases your cashflow, and may typically lower your cap rate on the investment versus increase it by financing your purchase ; however, using a lender limits your chances of securing more home buying investments since all returns go into your mortgage repayment and are personally reported on your personal credit. As a first-time real estate investor, it would be advisable to take full financial responsibility for the structuring and strategic, more creative financing of your investment to create additional profit potential and equity spread you can use to invest into additional home purchases.
5. Additional Fees
Lender fees may add up every month. From private mortgage insurance, to document production fees like payoff demands, it’s never ending. Furthermore, aside from the cost of interest, additional fees might apply; such fees include but are not limited to administrative, legal fees, and penalties. All these hefty fees can add up to make this home buying through conventionally financing your purchase the wrong choice, especially for first-time homebuyers focusing on long-term real estate investing even if you’re thinking to start by purchasing your own primary residence.
Getting hundreds of thousands of dollars together for investing into a property that you will either use as a personal residence, rental property, or second home/ vacation home is a privilege reserved for very few people. For most people, it’s impossible to buy a home without leveraging the funding from conventional or even hard money lenders. Is your goal to invest in real estate but you think you don’t have enough money or any money to do so? Do you think your only option is to go to a conventional lender or even a hard money lender to get a loan to finance your purchase? The truth is, those are just two traditional options. You can always expand your knowledge, intent and capacity to invest in real estate purchases by strategically leveraging creative financing options including cash that you may or may not have.
Download our free eBook at https://www.imperiumenterprise.com/buy-a-home/ to learn how to make smart real estate investment choices and achieve a high return on your investment using creative financing.