Although applying for a mortgage to purchase a home has become the default way of becoming a homeowner, there are actually a variety of alternative options that may be better practically and/or financially. Here are three creative ways you can buy a home if you're experiencing financial challenges or just want to get the best deal possible.
Cash First, Mortgage Later
As noted before, most people get approved for mortgages first and then hand the cash over to sellers once they find their dream homes. However, some homebuyers are reversing the process by paying for the home with cash and then taking out a mortgage on the home after closing.
There are some advantages to taking this tactic. All-cash offers are more attractive to sellers, because the risk of the sale falling through at the last minute because of funding issues is much lower. Cash offers may also make it easier to get the home at a lower price, and closings are much quicker since you're not waiting on the bank.
Some people manage to save the cash to purchase the home. However, the most common way people raise the money they need is by liquidating all their assets and tapping their social networks. Once the sale goes through, they take out mortgages to pay back the personal loans and repurchase their assets.
A third way people obtain the funds is by getting securities-backed mortgages. Essentially, people sign over their investment portfolios to banks as collateral for their loans. The bank gives them about 80 percent of the value and keeps the portfolio for up to 10 years. You can either stick with that loan or get a conventional one and pay off the first mortgage early. Be aware, though, you won't have access to your portfolio while the mortgage is active.
Rent to Own
Another alternative option for purchasing a home is to find a seller willing to do a rent-to-own contract. In rent-to-own home buying scenario, you would pay rent to the seller for a number of years before buying the home outright with a balloon payment at the end of the term.
Typically, you would still have to put up a down payment. However, the amount is significantly less than what would normally be required by banks. A portion of your monthly payments would go towards the purchase price of the home; so by the time the date for exercising the buy option comes around, you will have built up a sufficient down payment for the mortgage.
This is a great way to save money for a home while having a place to live and experiencing what it's like to be in the neighborhood. This option may be particularly beneficial to people who have credit challenges that make it difficult to get a mortgage. You can use the time to repair your credit enough to qualify.
There are drawbacks, though. The rental period is usually only for a couple of years. For instance, one company does contracts for between 12 to 36 months, which mean you may need to be ready to buy fairly quickly. Another problem is you may lose your entire investment if you fall behind on the payments and are evicted from the home.
It's important to read the contract closely to understand your rights and responsibilities, so there are no unpleasant surprises when things go wrong or it comes time to buy.
It's no secret that many Millenials are staying at home with their parents longer—or returning home—because of lack of job opportunities and other economic issues. Some families are taking advantage of this fact by engaging in a new trend called co-buying. This is when the parents and kids join forces to buy a home big enough for them to live together.
For instance, the family may purchase a home with two master suites or an attached mother-in-law apartment. Each party would have their own living spaces and contribute equally to the mortgage.
This is a great option for younger homebuyers who may not have the credit or income to qualify for a home mortgage. There's also something to be said about having family close by who can provide support when life gets rough. At the same time, privacy may be an issue and the kids may become the default caregiver for aging parents who fall victim to disease.
For more information about these and other home buying alternatives, contact a real estate agent.Share