Can't Get A Mortgage? Check Out These 3 Home Financing Alternatives
by Luke Fields
In recent years, it's become considerably more difficult to qualify for a traditional mortgage, and the terms have become more onerous for nearly everybody. There are some understandable reasons for this, but barriers to traditional mortgages can end up shutting out some good prospective homeowners. If you're having trouble qualifying for a conventional mortgage with reasonable terms, it may interest you to know that there are lesser-known, but perfectly viable, alternative financing possibilities out there. Ask your real estate agent about one of these 3 options.
Assumable Mortgages
If you can't get a mortgage on your own, or if you can't get one with a reasonable interest rate, you may be able to assume one. That is, you'll take over the mortgage payments from the seller, retaining their lender, their interest rate, and their payment schedule. This arrangement can have several benefits for you as a buyer. The chief advantage is that the seller may have a lower interest rate than you could get approved for, keeping your costs down. You may also be able to skip the appraisal, saving you money and streamlining the closing process.
There are disadvantages as well. Only certain types of mortgages are assumable – typically these are VA mortgages and Federal Housing Administration (FHA) insured mortgages. That limits your selection. You'll still have to be approved by the lender in order to assume a mortgage, and you won't be able to shop around and find a different lender. And, if the seller has a lot of equity in the home, you may need to make an unusually high down payment. An ideal assumable mortgage for a buyer is one in which the seller has a low interest rate and minimal equity in the home.
Family Loans
A family loan is exactly what it sounds like – the money for the home comes from a family member, or from a loan or line of credit in a family member's name. This is a good option for young, first-time homebuyers whose parents want to help them get into a first home.
The way that it works is this: the lending family member will use either their own cash, or the cash from a home equity line of credit or reverse mortgage to finance the home. To avoid the money being taxed as a gift by the IRS, the lending family member will need to fill out a mortgage repayment plan and charge interest; however, they'll have a lot of freedom to keep the interest rates low and the payment plan flexible and reasonable. This is a great option if you have family members willing to put their own money up for you to buy a home, but beware that financial entanglements with family members can cause tensions. Lenders can feel taken advantage of if the buyers don't pay, and buyers can feel overly restricted by familial obligations. If a foreclosure ever becomes necessary, it's liable to be a family crisis as well as a financial crisis.
Seller Financing
Seller financing is often poorly understood, and if you're considering that option, both you and the seller definitely need the services of professional realty services in order to protect the interests of both parties. In a seller financed real estate deal, the seller will essentially loan you the money for the home themselves. You'll pay a down payment and sign a promissory note that details the interest rate, down payment, and monthly mortgage payments. The seller can either collect the monthly payments from the buyer, or they can sell the promissory note to an investor for cash, and your payments will ultimately go to that investor.
As a buyer, this arrangement has many of the same advantages as the family loan, but without the family entanglements. You and the seller can work out terms that are mutually agreeable, which can be much more flexible than a bank's terms. You save money on bank fees and closing costs, and you can get into the house more quickly. However, you will still have to prove your creditworthiness, and you may expect to pay a higher interest rate than you would if you had a conventional mortgage. Plus, if it turns out that the seller doesn't own the home free and clear, the original lender may be able to foreclose on the home by demanding immediate payment in full – this is why you need the help of a real estate professional in order to avoid this type of complication.
Every type of home financing option has its own set of pros and cons. The key thing to remember is that you do have more options than just a conventional mortgage. A good real estate agent will give you more info and help you weigh each option and find the one that's right for you.
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About Me
Welcome to my website. My name is Larry Silva, and I want to talk a bit about private mortgage insurance. You may have heard the term PMI mentioned when you were in the process of purchasing real estate. When I first heard my lender talking about PMI, I was very confused. It was my realtor who sat me down and explained what private mortgage insurance was and when someone is required to purchase it. He told me that PMI is not lifelong insurance; it can be cancelled when the mortgage principal balance reaches a certain point. Once it was explained to me, private mortgage insurance was no longer a mystery or a confusing concept. I would like to pass on what I learned and hope that you find it to be of value.