A good rule of thumb when participating in a home auction is to have cash on hand. Some auctions require a cash deposit to participate, and buying with cash often simplifies the final transaction. However, buying an auctioned home without cash isn’t impossible. As a matter of fact, non-cash buyers have at least three different payment options at their disposal to secure their dream home. In this article, we’ll discuss how to purchase non-foreclosure auctions without cash on-hand. Let’s take a look at your options.
FINANCING
Owner financing is an agreement between a buyer and seller in which payment for a home is accepted in installments. This arrangement allows you to make smaller monthly payments over a predetermined, extended period of time. Financing through the homeowner differs from using a bank loan, as financed payments are not borrowed from another entity. Instead, payments are made overtime directly from the buyer to the seller.
At the auction, you won’t be the only buyer prepared to finance your purchase. Financing is a popular option for auction participants as it allows you to save costs upfront and negotiate a payment plan that works best for you. If your bid is successful, you have up to 30 days after auction to secure financing before closing.
LINES OF CREDIT
If you have ever made a purchase with a credit card, buying a home at auction with a line of credit will feel familiar to you. Lines of credit function the same way a credit card does, without the plastic. You can borrow funds from your line of credit to make purchases, pay down your balance and then borrow more to make new purchases, including buying an auctioned home. Lines of credit are either secured or unsecured. Each credit option can be used in relatively the same way, but how you obtain them differs.
To obtain a secured line of credit, you have to provide proof of an independently earned income or independently owned assets. These assets, which can come in the form of a car, a house or other valuable items, will then be used as collateral to ensure your credit balance is paid. If you fail to make your credit payments, your assets can be seized by the lender.
There are risks to any financial arrangement, so don’t let the possibility above scare you away from obtaining a secured line of credit. With secured credit, you can often qualify for better interest rates. Most importantly, you can establish a long-term payment plan, as opposed to paying the full cost of the home in cash at auction.
An unsecured line of credit doesn’t require collateral, opening up this financial option to a wider variety of buyers. Because your assets are not up for seizure, you may face higher interest rates when using unsecured credit.
LOANS
Loans offer a variety of options for non-cash buyers. Depending on your preferences and financial needs, there are three common loan types you can choose from before heading to auction.
Personal Loans
Personal loans are somewhat similar to financing. When you obtain this type of loan, you are entering into a financial arrangement that consists of scheduled, installed payments over time. The difference between the two, is that personal loans are provided by an institutional lender, such as a bank, while financing is arranged through the property seller.
Personal loans are unsecured, and thus, do not require you to offer collateral. This means, your assets aren’t at risk in the case of a default payment. Another benefit of acquiring a personal loan is that your funds are not limited to specific purchases, so you can use your loan as you see fit.
Hard Money
Hard Money is a loan that requires backing in the form of a tangible, individually owned asset. A hard money loan is secured by real estate, meaning you will need to offer up a property that you own as collateral. Hard money is provided by private investors, instead of the conventional lenders like banks and credit unions that offer personal loans.
To determine the amount you will receive, private investors assess the value of your collateral property. Since the focus is on property value, your credit history doesn’t need to be pristine to obtain hard money. You also don’t need to qualify for other loan types in order to get a hard money loan. If you are denied a personal loan from a bank, you can still acquire the funds to purchase a home at auction with hard money.
Private Money Loans
Private money is a loan obtained through personal channels. For example, if your spouse or close friend lend you money to purchase a home at auction, that is considered a private money loan. This type of loan is provided by a party that is known to you, often via a personal relationship, and does not involve a standard loan provider.
If you can access funds through your personal network, private money may be a good option for you. This kind of loan often offers greater flexibility in terms of amount borrowed, payment schedule and consequences for failure to repay. There’s even the possibility that you may not need to repay the lender at all, which is a unique benefit for this loan type.
When it comes to purchasing a home at auction, cash isn’t the only king in town. By utilizing the funding options that are right for you, you can purchase your dream home without breaking the bank. Start by finding the right auction for you.
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