Would you like to become a homeowner? Purchasing a home is a big decision and a considerable financial commitment, and for first-time buyers it can be tricky to qualify for a mortgage from a traditional lender if you haven’t saved enough for a down payment, or if your credit score is too low.
First-time home buyer programs are offered by both the government and some banks, but they still have criteria such as credit requirements and income limits. Fortunately, you have other options.
If you don’t qualify for mortgage financing or are simply curious about your options, here are four alternate routes to becoming a homeowner without a traditional mortgage.
1. Rent to Own
Renting to own can be a good alternative if you’re unable to save for a down payment or don’t qualify for mortgage financing due to a low credit score. In a slow market, a rent-to-own property may sell easier, while offering an owner the benefits of having a rental property, such as additional income and tax deductions.
In a rent-to-own arrangement, you pay the owner an option deposit, which gives you the option to purchase the home after renting it for a set period (usually 1 to 3 years) as outlined in your contract. Throughout the lease term, the owner will set aside a portion of your monthly rent and apply it to the purchase if you decide to buy the home when the Lease Agreement expires.
The main benefit of a rent-to-own agreement is that you’ll have time to rebuild your credit score, without feeling like you’re flushing your money away while renting. If you decide to buy the property, your option deposit and rent credits will make up a tidy sum to put towards the purchase.
2. Get Owner Financing
Occasionally, the owner may be willing to sell to you directly. This means they will finance your purchase, and you make monthly mortgage payments to the seller, rather than a bank.
Any real estate transactions should be documented in writing, so the seller and buyer should create a Real Estate Purchase Agreement to facilitate the sale and outline the payment details. In many cases, the seller will wait to transfer the property title until you have made your final payment, at which point they can use a Warranty Deed to transfer legal ownership.
It can be challenging to find a seller ready to enter into this type of arrangement, but those who have paid off their mortgage in full and don’t need the cash from the sale immediately may be more willing.
3. Get a Private Loan
If your credit score is too low to qualify for a traditional mortgage, you may have better luck with an investment lender or a peer-to-peer lender. While private lenders are less risk averse than banks, keep in mind they will likely charge you a higher interest rate (12-20%) to account for the higher risk of lending to you.
A more attractive option, if possible, is to borrow money from a family member or friend. It can be awkward to ask a loved one for such a large sum, but private home loans can be beneficial to both of you. While you will likely be able to negotiate more flexible payment terms and a lower interest rate with a family member than with a bank, your family member could potentially earn more interest off your loan than with other types of investments.
Even if you have a close relationship with the lender and trust each other, it’s still important to think of this arrangement as a business deal and protect yourselves with a written contract. A Promissory Note should be used to document the terms of the loan, including payment frequency, payment amounts, and how long you have to repay the money.
The lender should also draw up a Mortgage Agreement (or Deed of Trust, depending on your jurisdiction), which will put a lien on the property to secure the loan. The lien gives the lender the right to foreclose on the property if you fail to repay them. Once you repay the loan, the lien is removed.
4. Pay Cash
The last option is the simplest: pay for your home in cash. Making a cash purchase can save you money in the long run, particularly on closing costs and interest payments on your loan. Even better, you can enjoy being debt free and unburdened by monthly mortgage payments.
A cash purchase also has advantages for the seller, particularly if there is a bidding war and they want to make a quick sale. A cash offer also means they don’t need to worry about the buyer backing out of the sale because they are denied financing.
Of course, saving for a cash purchase is easier said than done, and you certainly do not want to put your entire savings into buying a home outright, at the risk of running into financial troubles down the road. Unless you have already accrued significant savings or just had a windfall, you will need to establish an aggressive saving plan, or consider one of the previous options.
Becoming a Happy Homeowner
Homeownership can sometimes seem unattainable, what with saving for a down payment, worrying about your credit score, and going through the process of applying for a mortgage. If you’re worried about qualifying for a mortgage, consider these alternatives to finance your purchase and put you on the road to becoming a homeowner.
Would you purchase a home without a mortgage?