Seller Financing
With a Seller Financing arrangement (also known as “owner financing”), the seller takes the place of the bank and holds the note. Since the seller is acting as the lender, the terms of the note can be customized to suit both parties as needed.
It’s also worth noting that seller financing is not, technically, a loan. A loan is when an entity or individual gives another individual or entity money to purchase something. In this case, the seller does not give the buyer cash but simply accepts the payment for the property in a series of installments.
Lease Option / Rent to Own
A Rent-to-Own arrangement is not exactly “financing”, but they can be structured to help a tenant/buyer purchase a home.
One type of rent-to-own arrangement is a lease option, where the tenant rents the property for a time, usually three years or fewer, with the option (but not the obligation) to buy the property outright at the end of the term.
Another variation is the lease purchase, where the tenant agrees to rent the property for a specified time and commits to buying the property outright at the end of the term.
The buyer usually pays an option fee or “consideration” upfront and the rent is often above-market rent. If the buyer decides not to buy the property at the end of the lease, the owner simply keeps the option money and any down payment credit.
Subject to
Buying a property "subject-to" means a buyer essentially takes over the seller’s remaining mortgage balance. It’s a popular strategy among real estate investors. When interest rates rise, it may also be an attractive financing option for general homebuyers.
For most homebuyers, the primary reason for buying subject-to properties is to take over the seller's existing interest rate. If present interest rates are at 4% and a seller has a 2% fixed interest rate, that 2% variance can make a huge difference in the buyer's monthly payment.
Hard Money / Private Money
Private money and hard money loans are a type of asset-based financing that is generally short-term; and popular for fix-and-flip investors.
Private money lenders are not subject to the strict underwriting standards of conventional lenders. This means they can extend loans to investors who would not qualify for a conventional mortgage due to credit requirements or because the property does not meet lending standards.
Hard money loans are more expensive than other types of financing. They generally require steep origination fees, higher interest rates, and other fees and expenses. However, the loans are not amortized, so monthly payments are typically lower. In addition, borrowers can get their funding faster than the conventional turnaround time, so they can take advantage of time-sensitive deals.