Buying a home is a major decision financially and emotionally. When you have a steady income and feel ready to establish roots, you’re probably ready to take the leap. But just like there isn’t one right home for everyone, there isn’t one correct way to finance a home purchase. From a conventional mortgage to crowdsourcing, check out the different home financing options you can choose from below.
Apply for a conventional mortgage
Conventional mortgages are the most common home financing tool. Conventional mortgage lenders, like banks and credit unions, typically require you have a credit score of at least 620 and a debt-to-income ratio lower than 50%. Down payments can vary, but you’ll likely need private mortgage insurance if you put less than 20% down.
Overall, conventional loans tend to have higher out-of-pocket costs but lower borrowing costs over the lifetime of the loan. They’re ideal for homebuyers with strong credit and employment history as well as significant savings.
See if you qualify for a government-issued loan
If you don’t qualify for a conventional loan, you may be able to secure a loan backed by the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) or Department of Veteran Affairs (VA). State and local governments also offer homebuyer programs with discounted rates, tax credits, down payment assistance and closing cost assistance.
You usually need a credit score of at least 500 to qualify for these programs, and you’ll typically need to provide extra documentation to prove your eligibility. Expect to get mandatory mortgage insurance as well. The looser down payment requirements make government-issued loans invaluable for some homebuyers with low savings, though.
Ask about seller financing
Believe it or not, motivated sellers are occasionally willing to forgo a formal lender. Some will even lend you the money themselves, meaning you pay mortgage installments directly to them. Seller financing may come with a high interest rate, require a hefty down payment or stipulate a balloon payment in the near future (often five years). It’s ideal for buyers that don’t qualify for traditional financing and sellers with a fully paid-off property.
The theory is that with time, you’ll be eligible for a conventional loan. Read any seller financing terms carefully, as this is a risky deal for the seller and lawyers typically recommend severe default consequences for the buyer.
Find an investor
Let’s face it, there are a lot of homes on the market that need sprucing up. If you’re handy and willing to take on a project, you can offer to fix one up on behalf of an investor. They’ll provide the funds and you agree to move out after a certain time so they can flip the property for a profit. Some investors will even split the proceeds.
You can also secure a private, personal loan to buy a home. These mortgages work very similarly to one you’d get from a bank or credit union. You sign a contract that specifies the terms of the loan and a payment schedule both parties agree to. If you don’t have a friend or family member in the position to invest, peer-to-peer lending sites like Prosper, CircleBack and Lending Club could be a good place to start.
Share your story on a crowdfunding site
Friends, family and strangers with deep pockets aren’t the only sources for your home fund. Much like a charity or individuals dealing with hard times, you can reach a wider range of potential donors by posting your story to a crowdfunding site. In addition to popular ones like Kiva, Kickstarter and GoFundMe, sites like Patch of Land, HomeFundIt and Feather the Nest were created specifically for this purpose.
You can share your page with people you know, encourage them to share with people they know and hope it spreads like wildfire. These small donations could help you raise a down payment faster than you know.
Tap your retirement savings
Financial experts do not usually suggest withdrawing your retirement savings before you’re ready to retire. Most IRAs, however, contain a clause where you can borrow up to $10,000 to finance a primary home purchase without facing the typical 10% penalty fee or paying taxes for the withdrawal.
You’ll have to act fast with the funds, though. You’ll have to purchase the property within 120 days of your withdrawal to lock in the terms. Most 401(k)s have similar clauses, allowing you to borrow up to $50,000. In this case, you have to repay the amount within five years to avoid the 10% penalty.
Rent to own
Renting may not be an attractive idea for a potential homebuyer, but a rent-to-own deal is a viable last resort. Depending on the arrangements, you would live in a home as a tenant for an agreed-upon length of time while you build ample savings and improve your credit enough to afford the property yourself. Some sellers may also allow you to pay a portion of the home’s purchase price — along with rent each month — to help you reach that point sooner.
To strike this type of deal, you may need to pay a one-time upfront fee known as “option money.” Typically between 2 and 7% of the home value, this may or may not go toward the home sale. Keep in mind that you could lose both the option money and any purchase credit you’ve paid if you decide not to buy the house.
Before you buy…
Buying your first home is an exciting milestone, but financing can feel overwhelming. Once you’ve nailed down a budget and reviewed your credit, you can assess which of the above home financing options is the right choice for you.
Before you pull the trigger, make sure you’ve also factored in all the costs homeowners tend to overlook. Down payment, closing costs, furnishings, appliances and improvements are just the beginning. From property taxes and HOA fees to homeowners insurance and upkeep, there are several recurring fees to keep in mind too.