You might be surprised to discover that you don’t have to go through traditional banks to get the funding for your home purchase.
There are more options than ever before when it comes to getting the money you need to buy a home. Whether you’re trying to buy a home with bad credit or you’re otherwise unable or unwilling to get a conventional mortgage, there are plenty of non-traditional mortgage lenders worthy of consideration.
1. Research online mortgage lenders
The rise of online lending has provided more people access to the money they need to buy a home. It’s now possible to quickly compare mortgage rates and terms and find lenders that fit your needs.
“Online lenders can be a great alternative to more traditional local brick and mortar banks,” says Randall Yates, CEO of The Lenders Network, a company that connects non-traditional lenders with homebuyers. “Especially if they have credit issues, are self-employed, or have a lower income.”
Yates points out that non-traditional mortgage lenders are more willing to take a risk on those with lower credit scores. On top of that, those with non-traditional income such freelancers and business owners might have a better shot at funding with online mortgage lenders.
The biggest advantage to going online for your mortgage is that you have access to more options and potentially lower rates. However, if you do have credit problems, it doesn’t matter what non-traditional mortgage lenders promise: You’ll still have higher interest rates.
Yates says that the main drawback to online mortgage lenders is the potential for mistakes. He points out that loan officers online are often busier than traditional lenders. “In some instances, this can lead to more mistakes and potential issues being overlooked by a rushed loan officer.”
If you decide to get an online mortgage, due diligence is essential before you close the deal.
2. Consider hard money lenders
Hard money lenders offer the chance for you to borrow a mortgage based on the asset in question. These alternative mortgage lenders often work with those who don’t want (or are unable) to work within traditional lending.
Sacha Ferrandi, founder and CMO of Source Capital Funding, points out that the biggest advantage to hard money lenders is that there is rarely a credit check. Instead, the loan is based on the value of the asset (in this case, a home).
On top of that, you have a little more leeway with your repayment. “We’re flexible and more willing to work on our clients’ terms, often accommodating to specialized repayment schedules and less-strict borrowing policies,” says Ferrandi.
However, it is important to understand that this flexibility comes with a price. You might need to make a higher down payment and pay a higher interest rate. “For some, hard money lending may be more of a financial responsibility than other loans, due to interest rates,” Ferrandi says.
He also notes that, like other secured loans, a hard money lender will repossess the collateral (your house) if you are unable to pay your loan.
Even with its drawbacks, hard money lending is an option for someone who has an untraditional financial situation. If you are self-employed or asset rich but cash-flow poor, hard money lenders can provide a solution.
3. Try a seller finance deal
When my grandfather sold a chunk of his farmland in the 1980s, he carried the note on the sale. He essentially took on the role of lender and the homebuyer submitted the payments and interest directly to him. It worked out well; the buyer stuck to the arrangement and for 30 years my grandfather received the income from his land sale.
“Having a seller carry the note is definitely doable,” says Casey Fleming, a mortgage industry veteran and author of The Loan Guide: How to Get the Best Possible Mortgage. “It does pose some risk to real estate brokers, so they tend not to encourage it. It’s a good solution, though.”
If you can prove to the seller that you will meet your obligation, a seller finance deal can help if you have a thin credit file or other issues with your finances.
These are often short-term arrangements — you might make regular payments to the seller for just a few years until the property has increased in value or your credit has improved enough to refinance with a more traditional lender.
The seller might also have more stringent requirements than a regular bank. You might need a higher down payment and you will probably have to pay a higher interest rate. Unless the seller is a family member, you could have a hard time convincing the seller to carry the note.
4. Ask your credit union
Though they work similarly to traditional banks, credit unions are often overlooked by borrowers. But if you have good credit, it’s possible to sometimes find lower rates — especially if you have a long-standing relationship with a credit union.
You will still have to meet credit and income requirements and your debt-to-income ratio and ability to repay are still a big deal, much like with a traditional lender. However, credit unions may be able to beat rates of traditional big banks.
5. Seek an alternative solution
Fleming points out that sometimes even traditional lenders are willing to do something non-traditional to attract grads who are wary of buying a home while saddled with student loan debt.
“Some lenders recently came up with a 125% loan-to-value ratio loan,” Fleming says. “You come up with a down payment — about 5% — and they finance the rest in a mortgage and simultaneously roll your student loans into the mortgage.”
If you have a higher interest rate on your student loans and are unable to refinance, this can be a way to combine your debt and save money. “This gives you a low fixed rate on the student loan debt and a 30-year payment,” Fleming explains.
With this method, borrowers might reduce their monthly student loan payment, but repaying their student debt over 30 years could mean paying more in interest. Of course, it also means that you end up with a higher overall payment for your mortgage.
Read more about the pros and cons of combining student debt with your mortgage here.
It’s important to consult a financial professional about your situation and carefully weigh your options. Non-traditional mortgage lenders and loans can provide you with solutions, but they usually come with their own drawbacks.