There's been a huge push to encourage consumers to buy homes. Recently, the Federal Reserve cut the national loan interest rate to 0%, according to The Wall Street Journal. This move has encouraged potential homebuyers to apply for mortgage loans for home purchases.
While a zero percent interest rate is highly attractive to many consumers, some potential home buyers are faced with the challenge of higher down payment on the traditional 30-year fixed mortgage. Potential home buyers are required to contribute in excess of 20% for a down payment on top of additional closing costs.
This is manageable for some, but for many others it can present challenges. In times like these, potential homeowners look for alternative financing options to help them achieve their goals. Most are fearful of missing great opportunities because they're not able to afford the cash needed for down payment and closing costs, or don’t have the credit to secure proper financing. Below are some alternative home loan options for you to consider.
First-time Buyer Loans
Lenders and especially banks are quick to give financially stable professionals or couples first-time buyer loans, because they are beneficial for everyone involved. The bank gets a new customer, while the borrower gets that precious loan they’ve been looking for at a discounted premium. Traditional FHA loans are the ‘go-to’ borrowing option for a large portion of citizens, especially those with unfavorable credit situations. Another additional perk of the FHA loan is the reduced down payment, as little as 3.5% percent.
When homeowners are looking to buy homes and sell their existing home at the same time, this can present a huge problem. Many times, homeowners are looking to sell their existing property in order to obtain the cash needed to buy a newer property. Often, it doesn't work that way. There are times when there is a period of overlap in the process. Luckily, some lenders offer a bridge loan, which does exactly as you’d imagine. The bridge loan offers the ideal situation when a borrower is in a disadvantageous financial situation. The bridge loan essentially borrows against your down payment on your new home while you are closing on your current home. However, offers like these do not come without risk. If you enter your repayment period of your new loan before your old home sells, you run the hazard of paying two mortgages at once. So be mindful of your situation, and exercise caution.
Borrow from Insurance or Retirement
If you find yourself in a stable employment situation, you’re more than likely contributing money towards your retirement or a life insurance policy. Many policies allow you to borrow against your future earnings. However, the major caveat to drawing money away early from your IRA or 401K is that many policies require a 10% penalty. Therefore you’re effectively taking money away from your future earnings that will never come back. Borrowing against an insurance policy could be a good option to secure a large downpayment, as opposed to helping with the entire purchase.
Rent to Own
Renting to own is less about securing long term or large scale financing, and more about entering a purchase agreement in which you rent a home for a designated period, with the option of then designating the money you’ve spent in rent towards the purchase of the home.On paper this sounds like an ideal situation for many! You can contribute money towards gaining equity on the purchase, without having to put down a large down payment. However, it does not come without a catch, Rent-to-Own agreements also require fees upfront (sometimes as much as 7% of the purchase price), and renters might be required to maintain the property during the time they are tenants. Additionally, like with any renting agreement, if the lease terminates before the property is purchased, you do not get any of your living expenses back.
Using these options is an excellent way for homeowners to consider buying a new and do it on their terms. It would be a highly unfortunate scenario for a homeowner to miss opportunities to buy a newer home because they're still dealing with selling their older home. In today's competitive real estate market, when you find a home you like, it is important to move quickly. When you're not able to move as fast as the next buyer, you often find yourself missing out on numerous opportunities which could cause a high level of frustration. This scenario can cause a homeowner to completely give up on the process altogether.
Dominic LoBianco is a content contributor on behalf of Homeward. Dominic creates multimedia content on a wide array of topics and themes, ranging from Property Management to Home Financing.