Thinking outside the box - buying a home without traditional financing
Don’t have a million $ or two to spare or the credit to secure a mortgage right now? Don’t lose hope. Your dream to buy a home is not over—there are other pathways to homeownership. Everyone’s circumstances are different, and there is no correct way to buy or finance a home. In fact, the provincial government has enacted housing legislation that allows multiple units on lots currently zoned for single-family housing, so more housing options are on their way. These are some of the options that are available to you right now:
Co-Ownership—This form of ownership is prevalent because it allows parties to share financial burdens regarding the property. It also allows you to pool resources for purchasing real estate in the future.
The primary forms are ‘joint tenancy’ and ‘tenancy in common.’
Joint Tenancy involves two or more people (commonly spouses or partners) owning property in equal undivided portions. When one joint tenant dies, the property is transferred to the surviving joint tenant. This means the property does not become part of the person's estate. Therefore, it avoids probate fees and taxes, and ownership will not be distributed among any estate beneficiaries.
Tenancy in Common: If two or more people own property as a Tenancy in Common, you can own different proportions of the property: for example, ¼ for one person and ¾ for the other. In addition, individual tenants can sell or mortgage their portion as they please. If one tenant in common dies, that person’s share of the property becomes a part of the deceased’s estate.
Rent to Own - This is an arrangement between you and a seller in which you rent the seller’s property before buying it for a predetermined price. Renting to own can be a good alternative if you can’t save for a down payment or don’t qualify for mortgage financing due to a low credit score. You act as a tenant, living in the home and paying rent, and the seller temporarily acts as your landlord in either of the following scenarios:
Lease-option: In this agreement, the tenant can buy the house at the end of the lease period but is not obligated to do so. You won’t suffer any penalties if you decide not to purchase the home. In this respect, it resembles a car lease. Usually, the tenant pays an option deposit when the agreement is signed and then pays the monthly rent payments. But be aware that the option deposit is not refundable if you decide not to purchase the home.
Lease-purchase: In this agreement, the tenant must purchase the house at the end of the leasing period. The tenant pays a small down payment at the beginning (usually around 1-5% of the purchase cost) and subsequent monthly rent payments. However, if the tenant backs out, they will lose their down payment and rent credit and may also need to pay a penalty.
Owner Financing
Occasionally, a seller may be willing to sell to you directly. Under this model, you make monthly mortgage payments to the seller rather than to a bank and take immediate possession of the property. Owner financing can benefit you and the seller by eliminating some banking costs.
These creative strategies are just some of the existing opportunities that may help you to solve your financing and deposit problems, but they all come with their particular pros and cons that you’ll need to consider. Give yourself time to go through all the elements, conduct research, and perhaps most significantly, seek expert guidance to compile all the necessary legal documentation.
Many other models are available, including co-housing and co-op housing, and we will address these in the future. Until then, happy home hunting!
