Buying a home can seem like a journey that has one specific process. There are offers to be made and counter offers to be considered. There is paperwork to be signed, in a particular order, and then there are keys that change hands.
It’s almost like knocking down dominoes, with the occasional detour or delay along the way. But when it comes to financing, there are a number of different ways to structure a purchase.
Creative financing when buying a home is particularly intriguing during an era of higher interest rates, for buyers who may have less than perfect credit scores and for those who are falling just a bit short on their down payment requirements. After all, only a small ratio of home buyers purchase a property without financing it.
Statistics reported by the National Association of Realtors indicate that 78% of buyers require financing to close the deal. But, just because a buyer requires financing to complete a purchase, it doesn’t mean that financing vehicle is always a conventional mortgage. It’s just the most common.
Conventional mortgages are ideal for home buyers who have a healthy credit history and credit score, and have the ability to come into the transaction with a sizable down payment. These types of loans also require a debt-to-income ratio that is lower than 50%. And, home buyers who don’t come in with at least 20% down will likely be required to add private mortgage insurance, which comes with an additional monthly premium.
Those who aren’t able to secure a conventional loan still have options. The Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the Department of Veterans Affairs (VA) offer loans for buyers who meet certain requirements, and the upside to those options includes a lower credit score requirement and a lower down payment requirement.
It’s also possible for a buyer to explore the potential of renting to own, which postpones a purchase but allows a buyer to take time to improve their credit score, work on their credit history and build their savings toward a bigger down payment. This type of arrangement involves a rental contract that includes specifics on the eventual purchase, and it could even include a stipulation that directs a portion of the monthly rental payment toward the purchase price.
Seller financing is a similar financing tool, where the seller carries the loan and the buyer makes payments directly to them instead of a bank. These types of arrangements offer similar benefits to the rent-to-own situation for those who need to work on their credit score or build their savings, but they may involve a higher interest rate or balloon payments when the arrangement reaches a designated term.
Creative financing for home buying takes different shapes depending on the situation. From more traditional approaches to some that are out of the box — including crowdfunding or pulling from retirement accounts — there are a number of different ways to finance the purchase of a home.
If you’re considering a home purchase or sale, the team at Halpern Residential is ready to help. We keep an eye on market trends so you don’t have to. Moving or investing in real estate is an exciting time of transition, and we’re ready to help you with it. Contact us today so we can learn more about how we can support your needs.