Buying a home is expected to be easier in 2015, thanks to some new mortgage guidelines that are making the rounds. Lower down payment requirements from Fannie Mae and Freddie Mac and mortgage insurance premium cuts on FHA loans should open the door for more first-time buyers but there are some borrowers who may still face obstacles in getting a home loan.
If you’re ready to become a home owner but you’re having trouble qualifying for a traditional mortgage, you shouldn’t assume that you’re shut out of the market altogether. There are a few ways to finance a home purchase that don’t involve taking out a big loan from the bank if you’re willing to think outside the box.
1. Buy on contract
When you’re financially able to afford a home but your credit is a barrier to getting a loan, buying on contract may be the answer. When you buy a house on contract, you make monthly payments to the seller or to a finance company on the seller’s behalf. The seller holds on to the title until you’ve paid the agreed-upon purchase price in full.
Buying on contract is similar to a lease-to-own arrangement but with some slight differences. When you lease-to-own, you typically pay your regular rent payment plus a few hundred dollars extra, which is held in escrow as your down payment. After you make a certain number of payments, you’d go through the bank to get a loan to finance the rest. If you decide not to buy, the homeowner gets to keep everything you’ve paid in.
In a contract for deed scenario, the seller is essentially financing the home to you so the bank never gets involved. That’s a definite plus if your credit is less than stellar. You may also have a bit more leeway with the down payment, since some sellers may be willing to accept less than the standard 20 percent down. The biggest downside with this kind of arrangement is that it’s up to the seller to determine what kind of interest rate you’ll pay, so it can be a more expensive way to buy compared to a traditional home loan.