Creative Lending And How To Keep Your Home

AOL Real Estate reported last week on a Michigan family who lost their home despite never missing a mortgage payment. The culprit: creative financing, they say. But not all creative financing is created equal, nor is it all bad, says Marki Lemons, a Chicago-based realtor and foreclosure coach. In this case, the company that sold the home, KMS Property Management, defaulted on its end of the deal, causing the bank to move in and foreclose.

How could this happen? Lemon gave us her take and her best advice for avoiding the type of creative financing that could leave you homeless.

Maybe your credit is less than stellar, but you want to buy a property from a company like KMS. The company, which holds a loan from a bank, can finance individuals even though they don't technically own the property clear and free. The problem arises when that company doesn't pay that existing mortgage, every month, on time. The bank will then foreclose on you, leaving you with nothing.

"It sounds a little crazy, but it happens all the time because a lot of people have existing mortgages on their home and if they don't pay those mortgages also, according to the terms, the bank will default on the original loan that's on the property," Lemon says. "Technically, this family should have been paying to the person KMS owed, to ensure they were able to have something in the end."

Some states allow for "intermediate mortgages" like this one, Lemon notes, in which companies or individuals hold a deed to a property and can in turn enter into a contract with you to provide equitable title and finance your purchase of the property. Before the property can be legally transfered, however, the deed holder would have to pay off their existing mortgage.

When entering into a creative financing situation for any real estate, you want to find out first if the company that's selling the property owns it clear and free. If not, check periodically to make sure that the property taxes are paid in full and that they haven't gone into default on their note, Lemon advises. "There's not a county in the United States where notice of defaults aren't public information. Wherever you're buying, real estate taxes are generally on a public website and so is a recording of the mortgage or the deed, in addition to if they default on it," she says. The moment they do, that lender has the right to file a notice of default in the county where the property is located.

"You have people out here who that's all they do," Lemon says. "They have properties that they know are going into default, they get people to come in with some type of creative financing, generally on a 'land contract' or 'lease with option to buy' or 'rent to own' situation; they get a huge downpayment, generally three to four months' rent, and then they default. They take their money; it's like they're padding their pockets, before they lose the house," she says.