Prospective homeowners have access to a variety of innovative mortgage financing options outside of conventional mortgages when contemplating home purchases. For some people, these options may make homeownership more accessible. One such option is a balloon mortgage, which offers lower monthly payments for a set amount of time before necessitating a sizable lump sum payment at the end of the loan. Buyers who intend to sell the property before the balloon payment is due or who anticipate large future income increases may find this arrangement advantageous.
Key Takeaways
- Creative mortgage financing options offer flexibility for homebuyers
- Non-traditional mortgage programs cater to specific financial situations
- Government assistance programs provide support for first-time homebuyers
- Alternative down payment options can make homeownership more accessible
- Adjustable rate mortgages offer initial lower interest rates but come with risks
In a rising-interest-rate environment, for example, buyers may be in a position to negotiate and enjoy an interest rate lower than what is available in the current market. Rent-to-Own Programs. There are also rent-to-own programs where buyers can begin paying rent on a property with the option to purchase at a later time. That is good for those people who need more time to build a bigger down payment or improve their credit score before they commit to a mortgage. The government helps buyers own homes through different assistance programs that are available even when one fails to meet some of the conventional requirements in mortgage financing. One such option to consider is the Federal Housing Administration loan, which has loosened credit requirements and low down payments.
This could be beneficial for those who are not quite eligible for a traditional mortgage, such as first-time homebuyers or those with less-than-perfect credit. There is also another financing option under the VA loan program, which is exclusively available to qualified active-duty military personnel, their spouses, and veterans. This could therefore assist military personnel who may not be able to obtain conventional mortgage financing or those who might want to take advantage of low interest rates and no down payment requirements. The USDA loan program is another government entity that assists in financing properties in eligible rural & suburban areas.
This can be beneficial to those purchasers who would not qualify for traditional mortgage financing and wish to purchase a home in a more rural area of the country. Additionally, to help individuals surmount financial challenges to homeownership, first-time homebuyer grants and down payment assistance programs are also commonly available through state and local housing agencies. In addition to government-sponsored down payment assistance programs, buyers are also benefiting from other alternative down payment methods that allow financing to occur without requiring a large down payment. One alternative to down payments is an “80/10/10 piggyback mortgage,” where a buyer takes out two loans simultaneously, with one to cover the down payment percentage and another to cover the remaining percentage of purchase.
| Financing Option | Interest Rate | Down Payment | Credit Score Requirement |
|---|---|---|---|
| Fixed-rate mortgage | 3.5% | 20% | 680 |
| Adjustable-rate mortgage | 2.8% | 10% | 700 |
| FHA loan | 3.0% | 3.5% | 580 |
| VA loan | 2.5% | 0% | 620 |
This may be an advantage to buyers in a rising interest rate market to be able to ‘lock in’ an interest rate lower than is currently offered by the market. Renting to Own Programs. Buyers may be able to rent a house with the option to purchase the home through a rent-to-own program. This might be advantageous to a buyer who wants more time to build up for a larger down payment or to improve their credit score before making a commitment through a mortgage. The government offers buyers assistance programs so they can allow themselves to become homeowners even when buyers do not qualify for conventional mortgage financing. A type of loan is the Federal Housing Administration (FHA) loan, which has relaxed credit score requirements and low down payments.
This will help first-time homebuyers who perhaps could not get a conventional mortgage or those with less-than-perfect credit. Also, financing options are made available through the Department of Veterans Affairs loan program only to qualified active-duty military personnel, their spouses, and veterans. This could be beneficial for military personnel who otherwise may not have access to conventional mortgage financing, or who want to take advantage of low interest rates and no down payment requirements. The USDA loan program is another government-subsidy program offering financing options in eligible rural & suburban areas.
That can be great for buyers who otherwise wouldn’t qualify for traditional mortgage financing and want to buy a home outside of highly suburban areas. First-time homebuyer grants and down payment assistance programs are also commonly available through state and local housing agencies in an effort to help people overcome financial obstacles to homeownership. Moreover, apart from government assistance programs, non-traditional down payment options also aid buyers in financing without requiring substantial upfront payments. A form of such an alternative is the piggyback mortgage, wherein a buyer acquires two loans at once: one for the down payment and the other for the remainder of the purchase price.
In this light, this might be very advantageous to buyers who do not have enough money for a conventional down payment or do not want to pay PMI. The buyer is also able to use a gift of equity towards the down payment amount with all or part of the seller’s equity. This can help buyers who are related to the seller and wish to save on their out-of-pocket expenses. Yet another alternative for a down payment is a loan option known as a Home Equity Line of Credit.
With this type of loan, home owners are able to use the equity they have built up in their existing home as collateral for a down payment on a new home. This might be a plus for those who have a lot of equity in their current house but perhaps don’t have the liquid cash needed for a traditional down payment. In addition, some lenders offer low-down-payment programs that carry a 3 percent down payment, further increasing accessibility for those with very little saved up. Even though the fixed rate remains the most common among homebuyers, adjustable-rate mortgages also introduce a new option for those who would want to take advantage of lower initial interest rates and consequently lower monthly payments.
Typically, an ARM features a lower introductory interest rate for some time and then changes annually as the prevailing market condition dictates. This could be good for buyers expecting their income to increase in the future or for those planning on selling before the initial rate period ends or refinancing the property. Another type of loan, an interest-only mortgage, allows its buyer to make interest-only payments for a predetermined period of time prior to being obligated to commence the principal balance payment. This could be beneficial in cases where a person expects their income to increase quite a lot in the future or would like the initial monthly payments to be much smaller.
Buyers should, however consider the risks associated with interest-only mortgages and ARMs that could include a hike in interest rates and the rate shocks at the time of change in loan terms as unexpected. Benefits to the Couples: This may particularly assist a couple that may want to purchase a house that would be financially difficult for one or both if it were entered into solely. Co-borrowers who are not occupiers.
Another option is to get approved for a mortgage as a non-occupant co-borrower, where an individual on the application will not be occupying the house. This works well for those wanting to help a friend or family member get financing without occupying the home themselves. Relevant Things to Consider.
Co-borrowers will have to be very mindful of their financial liabilities, as well as those risks involved in joint mortgages: joint responsibility for loan repayment and possible impacts on credit score. While creative financing options in mortgage lending offer a degree of flexibility and access for buyers with particular financial circumstances, careful consideration of pros and cons is warranted before engaging in a non-traditional mortgage program. Potential advantages of such loans include easier entry into homeownership with flexible loan terms, lower initial monthly payments, and minimum down payment requirements. Those with imperfect credit and very few savings can have access to financing for their dream homes through special financing options. However, some possible risks involved with creative mortgage financing include: variable interest rates, increased expenses over the long term, and possible implications on credit scores.
Choosing a non-traditional mortgage program involves a deep consideration of buyers’ long-term goals and financial positions. Also working with an experienced lender or financial adviser will put buyers in an even better position to make an educated decision about their route to homeownership and the intricacies that accompany creative financing alternatives. Conclusion: Creative mortgage financing options can certainly open up worthwhile opportunities for certain buyers with special financial circumstances to help them realize their dream of home ownership. From non-traditional mortgage programs and government assistance options to alternative ways of providing a down payment and shared ownership, the list of innovative financing options are endless and varied. But prior to choosing a particular financing option, buyers should also discern the potential benefits and risks associated with alternative mortgage programs.
Consulting with knowledgeable professionals and critically considering their goals about long-term finance, buyers can make fully-informed decisions regarding their mortgage financing and take another step closer to realizing their dream of homeownership.
If you are interested in finding out more about creative mortgage financing, then you may want to refer to this article on the different types of mortgage loans. The article gives an overview of a number of different mortgage options that you could use to finance your home in a more creative and flexible manner. This is a good article to have on hand in case you need alternative methods of financing for a mortgage.
