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Creative Financing Options For Your New Home

August 25, 2018

Buying a new home is often a financial juggling act, requiring a blend of loans, savings, and downright hard work. But this is actually a great time to be borrowing. New options in home financing, such as the rise of online lenders, offer alternative ways to pay for your home other than the traditional 30-year loan. These methods allow buyers to obtain more favorable rates or avoid rejection due to poor credit. If you’re looking for a different way to finance your new home purchase — or just want to explore all your options — here are a few ideas.

Choose an Online Lender
Not everyone fits the bank’s idea of the ideal lender. However, unfavorable credit scores and other issues that might exclude you from a conventional mortgage won’t matter as much if you choose to go with an online lender. Online lenders may offer more flexibility with income as well, offering loans even if you are self-employed, for instance, and cannot furnish a W2. These institutions, such as Quicken’s Rocket Mortgage or SoFi, service competitive loans 24 hours a day. Naturally, you still want to be discerning here, comparing the interest rates, terms, and reputation of various lenders. It’s a good idea to obtain pre-approval before applying as well, since it will help you get approved faster — and get you into your new home sooner.

Opt for a Construction Loan
If you’re building a brand-new home, you may qualify for a one-time close construction loan, also known as a construction-to-permanent (C2P) loan. Some C2P loans even allow you to use the value of the land as collateral, although others may require a 20% down payment on the expected mortgage amount of the completed home. The benefit is that you only pay interest on the outstanding balance during the construction phase. During that time, interest rates are variable, as determined by the Federal Reserve. After the home is completed, your loan converts to a permanent mortgage, where you may choose an adjustable or fixed rate. Unfortunately, you may have a harder time obtaining a loan if you choose to go this route. C2P loans are rarer than typical mortgages, and lenders will want you to provide in-depth details about the architectural plans, materials, and contractors before you’ll be approved. Ask your general contractor for help gathering this information.

Rent Out a Room
Sometimes the best way to pay off a loan is to generate capital after your purchase, not before. Renting out part of your space lets you put your new home to work, earning funds that you can put toward your monthly mortgage payments. This works especially well if you have a furnished basement, in-law suite, or other area separate from the main house that can afford a little privacy. Of course, you’ll need to take some precautions too: a credit check and airtight rental agreement will help you prevent problems and protect your home. After all, it’s still your home, too!

Apply for a VA Loan
If you’re an active service member, National Guard member, veteran, or military spouse (with some conditions), you may qualify for a home loan guaranteed by the Department of Veteran Affairs. These loans have exceptionally favorable terms: they require no money down and have lower qualification standards than other mortgages. Loans are backed by the US government and administered by approved private lenders. There is one catch: the VA limits loan amounts to $453,100 in most parts of the country, although you may be able to borrow more if you live in certain high-cost areas. To learn more about VA loans, visit the loan page on the VA’s website.

Go for a Securities-Backed Mortgage
If you already have a robust stock portfolio, you might consider a securities-backed mortgage. In this arrangement, a lender offers up to 80% of the value of your stock holdings. In return, you allow the bank to hold your stock holdings as collateral. Interest rates for these loans typically run between 3% and 5%, with 3- to 10-year repayment terms. At the end of your loan, you resume ownership of your stock shares. If the stock market remains favorable, this can be hugely profitable — to both you and your financial institution. But of course, like anything involving the stock market, it may be a bit of a gamble. Still, if you have the portfolio, it may be a more lucrative alternative to a conventional 30-year mortgage.

Call in Some Favors from Friends or Family
Sometimes the “Bank of Friends and Family” is the most favorable lender of all. If you have relatives willing to help, a private mortgage through a friend or family member may be the way to go.Like any other mortgage, the IRS requires friend and family lenders to collect interest. You’ll also want to draft paperwork that would be included in any other mortgage: a promissory note, mortgage or deed of trust, and perhaps a repayment schedule. Have a lawyer help you with these documents. The repayment terms are obviously up for negotiation, and your lender will probably offer some flexibility there. Of course, if you don’t want to put strain on the relationship, you should make an effort to make all payments on time!

Ready to start shopping for homes? Check out the new homes and developments at Paradisa Homes. We’re here to bring your dream of home ownership to life!