Traditional Versus Non-Traditional Home Financing
Owning a home is a dream of many Americans. However, in today’s climate, fulfilling this dream can be pretty challenging. As you well know, buying a home involves a lot more than simply choosing the right property and location. On the contrary, it requires careful planning and financing. Assessing your budget and available loans is the key to making a sound decision. While most people opt for traditional mortgages, one size doesn’t fit all. Depending on your credit history, score, and income, this type of financing may not be an option for you. Luckily, there are non-traditional options, too. Learning more about different types of home financing will help you do what’s best for you and make your dream come true.
Traditional home financing
For this type of financing for your new home, you borrow money from the bank or other private mortgage lenders. To apply for a traditional mortgage, you need to fulfill a certain number of conditions. Here are a few of them:
- You need to have a good credit history;
- Your credit score has to fit the lender’s criteria (most lenders require the lowest score of 620, though some may demand a higher score – about 660, or accept lower – about 580);
- The interest rate will depend on your credit history and credit score – the better the credit score, the lower the interest rate;
- Your debt-to-income ratio has to be 50% or lower in most cases;
- The down payment is typically 20%, though there are lenders who will accept a lower amount (in which case you might have to pay private mortgage insurance);
- The life of a conventional loan is usually 30 years (though it can be shortened to 15-20 years in some cases).
So, if you have good credit history and score, going the traditional route might be an option for you. Getting preapproved by a lender will help you get a realistic picture of what you can expect. Knowing the loan size, down payment, and interest rate in advance will enable you to find a perfect home that’s within your budget.
Non-traditional home financing
However, if you do not qualify for a conventional mortgage, lenders may offer you some alternatives. The non-traditional ways of financing include adjustments that will enable you to purchase a home without fulfilling the typical requirements. Here are some of the most common options.
After a mortgage, rent to own is the most popular option for home financing, and for a good reason. In fact, there are many reasons why this might be a good choice for you. A rent-to-own purchase is when the buyer and seller enter an agreement that states that the tenant (the future owner) will lease the property for a certain amount of time. This period may range from one to five years, depending on the contract. At the end of the lease, the tenant will purchase the home for a predetermined price.
So, if you have an unfavorable credit history (or no credit history), this might be the perfect solution. Extra time provides you with the opportunity to save money and build up your credit. Not to mention, you can move right in and experience your new home first hand.
However, the rent you pay will be higher than normal, and you’ll be asked for a down payment. If you fail to purchase the home at the end of the lease, the seller keeps the down payment and rent. This is an excellent solution, but only if you’re confident you’ll be able to buy the home in the given time.
With owner financing, the owner (seller) finances the purchase. So, instead of dealing with a traditional lender, you give the down payment (at least 20%) to the seller and follow it with further payments.
While this eliminates the need for a lender, appraisal, and home inspection, it also means paying a higher interest rate. The buyer and seller agree to monthly payments and other terms. After five years, the buyer has two options. They can make a balloon payment (pay off the rest of the amount owed) or refinance into a traditional mortgage.
So, if you have difficulties qualifying for a conventional loan, this might be a good solution for you. Although it’s typically more expensive and requires a lot of paperwork, it enables you to gain time and buy a home sooner rather than later.
Last but not least, there are non-conventional mortgages backed by the government. These include FHA, VA, USDA, and other similar loans. However, although you don’t necessarily have to have a score of 620 to qualify, there are different requirements.
For example, an FHA loan allows you to purchase a home with a credit score of 500 and a downpayment of 10%. But you’ll also have to pay MIP (Mortgage Insurance Premium) and meet other demands. A VA loan doesn’t require a downpayment, but it is targeted towards military professionals. With a USDA loan, you have to buy a home in an eligible rural or suburban area. Additionally, you need to have a sufficient household income for that area.
Assess your budget and explore different options
Before choosing your purchase loan, don’t forget to plan for other expenses, such as relocating to your new home, especially if you’re planning an interstate or a long-distance move. These can be pretty expensive, so make sure to find reliable movers in the Best Long Distance Movers database, and get an estimate in advance.
Additionally, consider all the potential repairs in your new home and living costs in your new city. All of these may affect your budget, so keep them in mind.
Finally, consider what type of home financing best suits your needs. If your credit score isn’t top-notch, you might have to work on it for several years. Only then will you be able to apply for a traditional mortgage. On the other hand, non-traditional loans enable you to move into your home right away and pay it off over time. What’s best for you will depend on your specific circumstances and preferences.