A conventional mortgage with a fixed rate is not the only option for a loan. However, it has been the industry standard for several years. More buyers are seeking unconventional loans each year. Some may not qualify for traditional loans because of their credit, and some may simply have alternative income or other limitations. There are several choices beyond the traditional 30-year mortgage with a fixed rate.
Seller As The Lender
If market conditions favor buyers, it may be possible to find a seller who will finance the home. With this type of arrangement, the buyer makes monthly payments to the previous owner. While this option may be possible with a seller who is desperate for money, it will not be a likely option with someone who can sell the home within a reasonable amount of time. This option is not possible if the owner wanting to sell the home is still paying off a mortgage for the property.
Life Insurance As The Lender
People who have whole life insurance policies with sufficient balances may borrow from their policies. The benefit is being able to buy a home, but there is also the disadvantage of being left with a reduced life insurance benefit. If the borrower named on the policy dies suddenly after the sale, life insurance benefits would only equal the amount remaining in the policy. It will also take time to rebuild the policy’s value, because it remains low until the loan is repaid. Be sure to ask an agent about penalties, taxes and interest for this type of loan. It is important to understand these factors before signing the papers.
Rent To Own
This is often known as a lease option. In some very rare cases, the seller will agree to take rental payments from the buyer until the home is paid in full. However, the agreement is set up similar to a lease. The buyer agrees to pay for a certain amount of time. If the buyer changes his or her mind after that time, it is possible to back out without obligation. Buyers who choose to buy the property may do so after that time period. This allows buyers to get their finances in order before making a large purchase. Keep in mind that the rental rates for such agreements are higher than typical rates.
Self-Directed IRA As The Lender
Many people are familiar with Roth IRAs, but there is another type that is self directed. This means funds can be invested in several ways, and the investor calls the shots. One option is to finance a property. Although the IRS forbids individuals to invest their funds on their own homes, a person who is not a relative can use a self-directed IRA to fund another person’s home purchase.
There are several alternative mortgage options. Balloon mortgages allow borrowers to pay low amounts for a long period of time and one final large payment. Pay-option ARMs allow borrowers to pay a specific amount each month that is not based on fluctuating interest rates. Interest-only mortgages are for borrowers who want to pay low amounts each month only for the first 10 years of the loan’s life. When considering any of these options, it is important to discuss the full details with an agent before filling out an application.