Getting mortgage is the most common way Americans buy a home. Even with fixed-rated mortgages average 7% at the end of 2022, most of us will wind up with a traditional mortgage.
However, there are alternative home financing options to consider, too. Alternative financing is becoming more common as more Americans are having trouble qualifying for a regular home loan. Let’s take a look below at some of the popular non-traditional financing options.
Interest-only mortgages are increasing in popularity again as rising rates are making it harder to afford mortgage payments. With an interest-only loan, you only pay interest on the first five or ten years of loan payments. This keeps the payment low for a time, but you are not paying down the principal. Once the introductory phase ends, the loan is amortized at current rates over the rest of the loan term.
Keep in mind that you will not pay down the principal during the introductory period. It may be best to choose this option to keep the payments low temporarily but refinance as soon as you can.
If you have bad credit, it will be harder to find a traditional home loan. A subprime loan may help you get into a home. Subprime loans have higher interest rates but the lending criteria is laxer. These loans also have higher fees, longer repayment terms, and sometimes have an adjustable rate.
As with other alternative lending options, consider getting a subprime loan temporarily until your credit improves. Then, refinance into a regular mortgage.
People considering subprime loans also may think about an FHA loan. Getting an FHA loan is easier than a traditional loan. You can have a 580 credit score and get a loan with a reasonable interest rate and 3.5% down.
FHA loans are the most popular option for those with average or poor credit. If you have paid your bills on time for a year or so, talk to your lender about an FHA loan.
A no-document mortgage does not require you to show W-2s or tax returns to get a mortgage. While true no-document mortgages are a relic of the early 2000s, there are still loans available if you do not have all of the typical financial documents needed for a traditional mortgage.
A common option is a bank statement mortgage. It relies on 12 to 24 months of bank statements to determine your eligibility for a loan. This option may be best if you receive cash deposits that can be traced in your bank account.
Or, consider an asset-based mortgage. The lender qualifies you on up to 100% of your liquid assets over a loan term. For instance, if you have $1 million in cash, you might apply for a 20-year fixed rate loan. In this case, you would need a $50,000 income to qualify for the 20-year loan.
This option is a good fit for high-net worth people with funds in investment accounts that can be converted to cash easily. Large banks may offer these loans to those with large cash deposits.
Also called a hard money loan, this is a loan from a private lender with a higher interest rate. It is best for people buying an investment property to rehab. However, some people use private money loans to buy a home if they cannot qualify for a traditional mortgage.
Later, once their credit improves, they may switch to a regular mortgage.
These are the most popular alternative financing options to buy a home. Talk to your lender about them today to determine which is the best fit for you.