Do you want to be a homeowner someday? Buying a house is a big decision with a big financial commitment, and it can be challenging for first-time buyers to qualify for a mortgage from a conventional lender if they don’t save the enough amount of money for a down payment or if their credit score is too poor…
What is a mortgage?
A mortgage is used to buy property. If you make regular repayments on the loan, it will enable the lender to sell off your asset and recover his initial cost. There are two major advantages of this kind of loan; one, if you fail to repay the loan, the lender can possess your asset again. Two, the longer you make payments, the bigger is your reduction in the amount of equity and lower will be your monthly payments.
Both the government and some banks sell first-time home buyer services, but they come with their own set of conditions, such as credit requirements and income limits. You do, however, have other choices.
In case you don’t qualify for a conventional mortgage or are just curious about your choices, here are four other ways to become a homeowner without one.
1. Rent to own:
If you can’t save for a down payment or don’t qualify for mortgage financing due to a low credit score, renting to own could be a viable option. In a slow market, a rent-to-own property can sell more quickly while still providing the benefits of owning a rental property, such as extra income and tax deductions.
In a rent-to-own agreement, you pay an option deposit to the owner, who gives you the choice to buy the home after renting it for a fixed period of time (usually 1 to 3 years) as specified in your contract. If you plan to buy the home before the Lease Agreement ends, the landlord can set aside a portion of the monthly rent and add it to the purchase.
The biggest advantage of a rent-to-own deal is that you’ll have more time to improve your credit score without feeling like you’re wasting money while renting. If you plan to buy the house, your choice deposit and rent credits will add up to a substantial amount that you can use against the purchase…
2. Take out a loan from a family member or friend:
In rare occasions, the owner can be able to sell directly to you. This means they’ll fund the purchase, and instead of paying a bank, you’ll pay the seller a monthly mortgage payment.
To make the sale easier and outline the payment information, the seller and buyer should develop a Real Estate Purchase Agreement. The seller will also hold off on transferring the property title until you have made the final deposit, at which point they will use a Warranty Deed to transfer legal possession.
Finding a seller willing to enter into this form of deal may be difficult, but those who paid off their mortgage fully and don’t need the money from the sale right away will be more willing.
3. Take out a personal loan:
In case your credit score is too poor to qualify for a conventional mortgage, an investment loan or a peer-to-peer lender could be a better option. Though private lenders are less risk averse than banks, you can expect to pay a higher interest rate (12-20%) to compensate for the increased risk of lending to you.
If possible, borrowing money from a family member or friend is a more appealing choice. Asking a loved one for such a large amount of money can be uncomfortable, but private home loans can be advantageous to both of you. Although you’ll probably be able to negotiate more flexible payment terms and a lower interest rate with a family member than you can with a bank, your family member will be able to collect more interest on your loan than you will with other types of investments.
Even if you and the lender have a close friendship and trust each other, you can treat this as a business transaction and cover yourself with a written contract. The terms of the loan, including payment amounts, payment frequency, and the length of time you have to repay the money, should be recorded using a Promissory Note.
A mortgage agreement should be drawn up by the lender, which will place a lien on the property to protect the loan. In case you don’t repay the loan, the lender has the power to foreclose on your home. The lien is excluded after you have paid off the loan.
4. Make a cash payment
The final choice is the simplest: pay cash for your house. Making a cash purchase will save you money in the long run, particularly when it comes to closing costs and loan interest payments. Even better, you’ll be debt-free and no longer have to worry about making regular mortgage payments.
A cash purchase has benefits for the seller as well, particularly if there is a bidding war and they need to sell quickly. A cash offer often eliminates the buyer’s risk pulling out of the transaction due to a lack of funding…
Saving for a cash purchase is simpler said than done, and you definitely don’t want to invest all of your money into a home purchase outright, risking financial difficulties down the line. Whether you have considerable savings or have recently received a windfall, you may need to start saving aggressively or consider one of the previous choices.
Buying a home can be stressful, time-consuming, and sometimes unaffordable because of saving for a down payment, worrying about the credit score, and going through the mortgage process can be added to the equation. A mortgage can only finances the purchase of the long-term goal if you can meet those standards. When you’re concerned about making the mortgage loan application, consider certain options to prepare for the future.