With banks and lenders being stricter on who they loan money to, it’s getting more and more difficult to qualify for a traditional mortgage. There are several reasons why you might get denied if you apply for a traditional mortgage. Do you have a foreclosure in your past? Do you own a business with substantial assets but you cannot prove a decent cash flow? Or are you self employed, which means that you have an irregular income? These and other reasons are why many people look for alternatives to traditional mortgages. Here are a few mortgage alternatives that you may have never even thought of.
1. Seller Financing
With seller financing, the current homeowner offers to sell you the house. You make payments to them but they continue to hold the note until you have paid off the home. This alternative may be a feasible option in a variety of situations. The homeowner may be trying to sell the home but they are not having much luck in finding buyers because of strict bank and lender qualifications. When this happens, the homeowner may take a chance on a buyer. Often, seller financing takes place between two parties that know each other. When the seller becomes the “lender,” an agreement is drawn up between both parties in the form of promissory note which details the interest rate, payment terms, consequences of default and other details.
2. Leasing or Rent to Own
This is a popular alternative to a traditional mortgage because the home buyer can rent the property that they are planning to purchase before they make their final decision to buy it. With a rent to own (which is also called lease to buy, lease to own or a lease option), the homebuyer and the seller come to an agreement for a specified period of rental time. The buyer has the option to purchase the home at the end of that time or they can come to another agreement to continue renting or move out.
This is an ideal mortgage alternative because it is designed for home buyers who may not be able to purchase right now, but who expect to build up a down payment, improve their credit score and be in a better overall financial position in the next few years. It’s also a great mortgage alternative for someone who may be moving in the next few years and does not want to commit to purchasing the home until they have more certainty about their plans and future location.
With a rent to own or lease option, the buyer monthly rent to the owner of the home. The rent cost is typically inflated and the extra money goes toward a down payment on the home at the end of the rental agreement. If the buyer decides that they do not want to purchase the house, the extra rent money is forfeited.
3. Borrowing from a Self-Directed IRA
This option is typically designed for investors who want to buy a home but don’t have the upfront cash to make it happen. A self-directed IRA is somewhat like a Roth IRA or a traditional IRA but it has more flexibility and it is managed by someone else, a custodian, on behalf of the IRA holder. The IRA can invest in real estate, equities, franchises, private equity, etc.
The main catch with using a self-directed IRA to invest in a home is that the IRS does not allow you to use your own account or the account of a relative or business partner. You cannot use your own self-directed IRA to purchase a home. But you can use the money from another person’s self-directed IRA if they are not related to you. There are many investors who will allow buyers to use money from their self-directed IRAs as an investment deal. The investor would own an interest in the property or the investor can simply loan the money llike a regular mortgage.
These are just three of the alternatives to a traditional mortgage that you may be able to utilize if you can’t qualify for a traditional mortgage loan. Try these options to achieve the dream of home ownership in a non-conventional way.
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