Mortgages & Home Loans Financing Your Home Purchase Buying a Home With Creative Financing By Elizabeth Weintraub Elizabeth Weintraub Facebook Twitter Elizabeth Weintraub is a nationally recognized expert in real estate, titles, and escrow. She is a licensed Realtor and broker with more than 40 years of experience in titles and escrow. Her expertise has appeared in the New York Times, Washington Post, CBS Evening News, and HGTV's House Hunters. learn about our editorial policies Updated on November 19, 2021 Reviewed by Andy Smith Reviewed by Andy Smith Andy Smith is a Certified Financial Planner (CFP), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. learn about our financial review board Fact checked by David Rubin Fact checked by David Rubin Facebook Instagram Twitter David J. Rubin is a fact checker for The Balance with more than 30 years in editing and publishing. The majority of his experience lies within the legal and financial spaces. At legal publisher Matthew Bender & Co./LexisNexis, he was a manager of R&D, programmer analyst, and senior copy editor. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Creative Financing With Off-Shore Foreign Trusts Subject to Transactions Buying Options Using an Assumable Loan to Buy Property Land Contracts Seller-Carried Mortgage or Trust Deed Dodd-Frank Act and Creative Financing Terms for Home Buying Photo: Eric Audras / ONOKY / Getty Images Creative financing in real estate was a super hot topic in the 1970s. It's hard for me to believe that many of the pioneer legends in creative financing are dead now, but what a crazy ride during its peak. When interest rates jumped to 18% in the early 1980s, many buyers were forced out of the real estate market, and creative financing sprang to life out of that need. A lot of homes for sale were advertised with the initials OWC, meaning the owner will carry (the owner financing). During this time period, anything and everything was done under the guise of creative financing. The pace was so frantic that many agents did not stop to consider whether the types of deals they were putting together were legal much less ethical. Just about any process that could be conceived, even if it wasn't a good idea, was often utilized. Key Takeaways Some examples of creative financing that have been used in the past include land contracts, off-shore foreign trusts, and situations in which the buyer takes over the seller's mortgage.The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced stricter regulations that made creative financing much less common.Dodd-Frank impacted many areas of financing, and the impact on creative financing is just one example. Creative Financing With Off-Shore Foreign Trusts Some people still operate under an off-shore foreign trust today, but if the IRS finds them, these people might end up in jail. The IRS does not look kindly upon off-shore foreign trusts, regardless of what a fast-talking salesman in an expensive Italian suit says. An off-shore foreign trust is a way to move money to another country secretly. Tax dodgers then let the trust domiciled in that foreign country buy the property. Subject to Transactions Buying Options Many loans did not carry alienation clauses that called for acceleration, so buyers could take over the payments on an existing loan, leave the seller's name on the loan, and it was OK. Whoa. Banks did not like being locked into a lower interest rate and losing a potential borrower when buyers bought homes with subject-to financing. Subject-to transactions are risky today because lenders can and will call the loan due on sale. Not to mention, most sellers do not want the liability associated with a subject-to transaction. Using an Assumable Loan to Buy Property Some types of mortgages openly advertised that a new buyer could assume the existing owner's loan. If the buyer qualified to assume the loan, the bank released the seller from liability. A loan assumption saved a buyer in those days thousands of dollars in lender fees, and many sales could quickly close under these terms. Today, there are few to no assumable loans available. Land Contracts A problem with a land contract is finding a title insurance company willing to insure the transaction. Not to mention, a land contract, which delivers the equitable title to a buyer, generally does not contain an underlying mortgage because most loans contain an alienation clause. A land contract is best used when a home is owned free-and-clear by the seller. Seller-Carried Mortgage or Trust Deed If a seller owns a property outright and wishes to carry the financing for the borrower, an easy-to-use instrument is a mortgage or a trust deed. Each state has its own laws about whether it is customary to record a mortgage or a trust deed. In California, for example, grant deeds to convey title and trust deeds to secure promissory notes are commonly used. Another option is for the seller to offer a wraparound mortgage, where they retain their original home loan and receive payments from the buyer. Dodd-Frank Act and Creative Financing Terms for Home Buying The Dodd-Frank Act is a shortened term for the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July of 2010. Penned by former Congressman Barney Frank and then-Senator Christopher John Dodd, the Dodd-Frank Act brought about sweeping changes to financial regulations and amended the Truth In Lending Act. This comprehensive transformation created new agencies and changed many laws. You can't swing a dead cat in financing without hitting the Dodd-Frank Act. Part of the Dodd-Frank Act pertains to seller financing. It regulates and disallows certain types of financing that were easily allowed in the past. Unlike the free-swinging days of the 1970s when anybody could arrange a loan and get paid for it as long as the person had a real estate license, now an individual must be licensed as a mortgage loan originator.Sellers are exempt providing they don't extend owner financing terms on more than three properties a year. Other rules are: The seller can offer owner financing as long as the seller did not build the home. This eliminates home builders from offering owner financing. There is no balloon payment. A favorite way to offer creative financing was generally a short-term loan, say three or five years, with a balloon at the end, meaning the entire balance would be due and payable. Owner-financed loans must now be amortized. The seller can't offer owner financing to just any buyer who happens along. The seller has a responsibility to determine that the buyer is qualified to buy the home and pay back the loan. This could mean the seller would need to run a credit report on the buyer, which would probably eliminate all home buyers with bad credit. The loan must be fixed-rate or adjustable after five years subject to reasonable annual increases, and a reasonable lifetime cap. The owner-financed loan must meet other criteria established by the Federal Reserve Board. However, it's the no-balloon requirement that will put a stop to many creative financing endeavors. A solution for some sellers and buyers might be a lease-option sale. Before buying a home through creative financing, get legal advice. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Freddie Mac. “Nowhere to Go but Up? How Increasing Mortgage Rates Could Affect Housing.” Internal Revenue Service. “IRS: Criminal Investigation Annual Report 2019,” Pages 10, 19, 30, 40-41. CA.gov. “7 Principal Instruments of Transfer,” Page 111. CA.gov. “Trust Deed Investments - What You Should Know!!,” Pages 1-3. Congress.gov. “H.R.4173 - Dodd-Frank Wall Street Reform and Consumer Protection Act.” Consumer Financial Protection Bureau. “Secure and Fair Enforcement for Mortgage Licensing Act,” Pages 1-2. Electronic Code of Federal Regulations. “§1026.36 Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling.” Govinfo. ”Dodd-Frank Wall Street Reform and Consumer Protection Act, Sec. 1401. Definitions,” Pages 124 STAT. 2137-2138, 2144.