How to Buy a Home If You Don't Qualify For a Mortgage
For some people, buying a home can seem like just a dream and not a reality.
There are hurdles that can deter us from ever purchasing a home, namely financial hurdles.
These financial obstacles stop millions of people dead in their tracks from even considering the ability to buy a home.
Let's look at some of the reasons you might not be able to purchase a home in the traditional way.
Reasons You May Not Qualify to Purchase a Home
A mortgage loan is the most traditional, and probably the smartest way, to buy a home.
There are a few different reasons you might not be eligible to buy a home in this usual way. Let's look at the top reasons.
Not Enough Funds for a Down Payment
One of them is not having the funds to cover the down payment.
In fact, according to the National Association of Realtors Home Buyer and Seller Generational Trends Report, more than one in ten potential home buyers believe that saving for a down payment is the most difficult step in the home buying process.
Whether it's because you don't make enough, have a lot of other financial obligations, or are living paycheck to paycheck, millions of Americans find it nearly impossible to put aside enough money to save.
Not Enough Income or Assets
You might have applied to a lender and got rejected from getting a loan primarily because the lender doesn't feel you make enough or have enough assets to satisfy the loan.
You get a loan from a bank and you expect that your monthly mortgage payments will be the same for the next thirty years.
Having a Bad Credit Score
While having a credit score in the fair range or even in the poor range may not immediately disqualify you for a mortgage it can mean that the interest rate might be too high for your to afford.
The better your credit score, the better your interest rate is going to be.
And, if your score is low enough or you don't have a credit score, it will make you ineligible for a loan.
Too Much Debt
In the meantime, we rent. And especially for millennials or young adults, our monthly rent takes a huge chunk out of our income.
Add to that our student loans, our utility bills, our electric bills, our cable and Internet bills, and all the money we spent to buy clothes to look respectable at our jobs and you come out with the expected.
Even if you make a lot of money, have enough for the down payment, and have a good credit score, if you're debt load is too high a bank can say no to your mortgage application.
Combine all three of these factors and the prospects of owning a home can seem next to impossible.
However, there are creative alternatives that may surprise you exist as an option to become a homeowner.
Alternative Methods to Achieving Homeownership
The usual alternative you might think of turning to is either family or government-backed programs, which we discuss later in this article.
Conventional family or government-back assistance may help some buy a home but it still leaves many stranded without a shred of hope.
However, through some thinking outside the box, pairing up with open-minded sellers, or using technology you might be able to purchase a home just when you might think it's impossible.
The following are less common ways you might be able to achieve your dream of homeownership.
If you can’t get a mortgage with a mortgage lender, you can try seller financing, sometimes called owner financing.
Seller financing is when a seller, usually an individual, allows you to purchase the house that they own and extends a private mortgage to you.
This can be similar to a rent-to-own option but is different in a couple of key ways.
Many who can’t make the payment for closing costs and other home issue costs will find seller financing attractive because you and the seller may be able to put in writing a payment plan that works for both parties.
The seller handles the mortgage like a bank and would hold the mortgage while you make payments to him or her.
The buyer is buying the home directly from the seller but the downside is that there can be finagling when both parties draw up the agreement.
However, seller financing is attractive because there are usually no closing costs and no appraisal of the home.
If you decide to go this route, make sure you get lots of good legal advice!
Pros and Cons of Seller Financing
- Sellers are often more flexible than a bank in the amount of down payment.
- The seller-financing process is much faster, often settling within a week.
- Great for buyer who can’t get traditional financing when wanting to purchase a house.
- By avoiding banks and other lenders, homebuyers may pay fewer fees and fewer closing costs.
- Buyers pay a higher interest rate than from a bank so the seller can make a profit.
- Some buyers may have to pay property tax and insurance on their monthly payments.
- May get stuck making a balloon payment at end of mortgage term.
- If you can’t afford to cover the cost of a balloon payment, seller financing might not be right for you.
- Loan terms are usually short.
Renting-to-own is when a buyer pays a monthly rent to the seller and moves into the seller’s house right after both parties accept the rent-to-own agreement.
So as soon as the contract is drawn, the buyer moves into the seller’s home as a renter.
The great thing about rent to own is that a portion of the rent that the buyer pays goes toward the sale of the house.
After a period of time—it depends on how many years the seller is allowing the buyer to rent the house—the buyer then will use the money set aside to pay for the down payment.
And during the process, the buyer can work on raising her credit score so at the end of the contract the buyer will be in a better position to get a favorable loan when the buyer eventually buys the seller’s home.
A seller may be motivated in this type of transaction if the purchase price of the home is increased so that the seller can make a profit.
Because basically, the seller is giving the buyer an interest-free loan for a certain amount of years while the buyer lives in the house.
However, due to the uncertain nature of the agreement, the buyer or renter may actually never end up buying the home.
Pros and Cons of Rent-to-Own
- Works for those who have money but not enough and a low credit score.
- Many landlords and rent-to-own sellers accept lower standards of credit than mortgage companies.
- You’ll invest 2.5% in your rent-to-own property from the very beginning.
- By adding rent credits into that sum, you may qualify for a loan with a more affordable monthly payment.
- You don’t have to wait to move into your dream house.
- Your rent will be a bit higher since some of it will go to your future mortgage.
- The seller profits when the buyer ups the sale price of the seller’s home to make it attractive but then has to pay a higher monthly loan.
- Lenders tend to look in the 620 to 660 range, but better rates are given to those with a higher credit score.
- Premium payment and rent credits are non-refundable. If you back out of the agreement, you’ll lose your initial investment for good.
- You may be responsible for repairs while renting.
Key Difference Between Seller Financing and Rent-to-Own
As mentioned above, there are a lot of similarities between seller financing and rent-to-own.
They're both options for people who might not qualify for a traditional mortgage, they involve a monthly payment to the seller, and you can move in right away to your home.
However, there is a major difference between these two arrangements.
When it comes to seller financing, the buyer's name goes onto the deed of the property once the buyer and seller close on the agreement.
Thus, homeownership transfers directly to the buyer in the case of seller financing as in a traditional purchase.
Furthermore, installed payments to the seller are in direct payment of the loan plus any interest accrued.
In a rent-to-own scenario, the buyer simply inhabits the property as a renter with the promise to purchase the property at a later date, hopefully being able to secure funding by that time.
However, once the deadline is reached a renter or buyer can opt out of the purchase.
Lastly, the monthly payments made to the seller/owner are rent payment, some of which is allocated towards the purchase.
How Do You Find a Rent-to-Own or Seller-Financed Listing?
Occasionally a seller or landlord will put this option in their description or directly in their advertisement.
Some listings sites claim you can find these types of listings right on their website, and you might have luck finding these types of listings using these two methods.
However, another strategy is to ask the seller or landlord directly if these are options.
These could be possibilities if the seller doesn't feel totally ready to sell the property or if the property itself was an investment property, to begin with.
Real estate investors might be more likely to be open to these types of outside-the-box arrangements but there is still a level of risk for them in accepting this arrangement.
Always, make sure you get good legal counsel before entering into either a seller-financed or rent-to-own contract.
Buy a Home At Auction
If cash is not your problem, but you can’t find a conventional lender who will take you on for a mortgage loan (for example, your credit score may be terribly low), you should check out local real estate auctions.
The homes found at auctions tend to be foreclosed or are major fixer-uppers.
But you have the cash, as the entire purchase price of a home you fell in love with at auction will need to be paid that same day.
An auction benefits you in three ways.
Since you pay in full upfront, you won’t have a monthly mortgage payment.
In some cases, you can end up with a home with a higher value than what you paid for or has more square footage than you could normally afford.
Overall, this might be the way to go for someone who has the money for a down payment but not enough for the whole purchase and doesn't have credit or very poor credit.
It's important to remember, however, that you'll not just need the money for the purchase but all the other fees associated with the auction.
Pros and Cons of Buying a Home at Auction
- Buying a home at auction means you’ll have the potential to pay far below the market value of the house.
- Owners selling their homes at auction are usually looking to sell fast rather than turn a profit, allowing the buyer to get some great deals.
- Buyers steer clear of auctions because of cash upfront; but in some cases, you can finance the home.
- You can’t inspect the property beforehand.
- Auction homes are sold “as is,” which means the owner doesn’t need to disclose the condition of the house.
- Even if you’re able to buy a home all-cash, you’ll still need an earnest money deposit and funds to pay for repairs.
- Getting carried away to be the winning bidder at auction may cause the bidder to wind up paying more than the home is worth.
- A fixer-upper may need a lot of work.
Borrow From Your Insurance Policy
Permanent life insurance allows policyholders to borrow against the cash value of the policy.
This is a great way to finance a home because the loan doesn’t have to be paid back.
In addition, it’s an easy process. There are no loan requirements and you can use the cash value for any purpose, not just to buy a home.
You have control over paying back the policy, unlike many other types of loans.
And besides, a life insurance account has low-interest rates.
Borrowing against a policy that has cash value is another way of borrowing from yourself.
Pros and Cons of Borrowing Money from Your Insurance Policy
- The insurance company uses your cash-value account as collateral for a loan, thereby eliminating the lengthy application process or credit checks.
- There are no qualifications needed besides having enough money in your cash balance to fund the loan.
- The money from the loan can typically be in your pocket in as little as a week.
- Your cash value is yours and you can borrow against it without fees or cost, although you still have to pay the interest charged to you by the insurance company.
- Unlike typical consumer loans, your life insurance loan will not show up on your credit report.
- You can typically borrow up to 90-95% of the cash value of your whole life insurance policy from your insurance company.
- Heirs will end up with less money from the life insurance policy.
- If you fail to pay the insurer the annual interest, the interest payment will be added to the value of your outstanding loan.
- If you don’t pay back the loan, the interest being charged reduces your cash value.
- Policyholders need to be careful about managing their account's cash value and paying off interest as required.
Shared Equity Agreement: Haus
Shared equity vendors like Haus use a different approach to purchasing a home aside from traditional financing.
Haus, a newly formed startup, also helps potential homebuyers.
Here’s how it works. You sign up with Haus and put down 10% on the home. The rest of the money you may need is paid by Haus using cash.
The buyer pays Haus back with a monthly payment plan that is up to 30% less than the cost of a traditional mortgage monthly payment.
In this setup, Haus holds the deed and the buyer has the title, which means the buyer has to pay the taxes.
In addition, the buyer also pays for the private mortgage insurance. You’re not being cheated here. Most lenders require you to pay the insurance if you put forth a down payment that is less than 20%.
Finally, a percentage of the monthly payment plan is reserved for purchasing equity in the home from Haus.
Pros and Cons of Using Haus
- You can increase your ownership when you want.
- Haus invests in both single-family homes and condominiums.
- Considers homeowners with a debt-to-income ratio of up to 45%.
- Only available in California, Oregon, and Washington.
Crowdfunding is best known as a way for entrepreneurs to fund their businesses or help fund new ventures.
Crowdfunding uses small amounts of funds from large groups or individuals.
Besides entrepreneurs, crowdfunding is also used by nonprofit organizations that need to raise money for an upcoming milestone, such as a charitable or fundraising event.
But these days it can also help aspiring homeowners raise funds to buy a home.
Crowdfunding for buying a home is relatively new to the scene but is being used by potential homeowners more these days.
It provides newbie buyers the support, education, and platform they need to crowdfund a mortgage down payment or closing cost fees.
Basically, you can pitch your fundraising project to everyday Internet users. If these people accept, they then will contribute to a pool of capital that is collectively formed.
In sum, you are asking strangers in random acts of kindness to make micro-donations and the people that get hooked do so because they believe in your cause.
Crowdfunding to Assist with Your Down Payment and Closing Costs
Some non-traditional home finance sites below are helping the potential buyer raise funds for a down payment provided that the buyer is unable to qualify for a traditional mortgage or lacks a 20% down payment.
GoFundMe, after so many years, is still the most popular online donation site that helps people by raising money. According to GoFundMe, it’s the world's largest social fundraising platform.
You can raise money for nearly anything. You can raise money to buy a prom dress or have dental work done that’s not covered by your dental insurance.
So it’s okay if you use GoFundMe to raise funds for your down payment.
To do this, you create a campaign describing your need for a down payment. Then you set up a goal on how much you wish to raise.
To better help your cause, use your description to tell a story, the story about why you need the funds, and then add related photos. People respond more if there is storytelling.
Pros and Cons of Using GoFundMe For Financing a Home
- Only site where your donation is protected. So your funding is guaranteed.
- Collects a 2.9% processing fee plus 30 cents on each donation.
- The money you raise can be in your hands quickly.
- No charge when you start a campaign (platform fee).
- Can only create a campaign in 19 countries (North America is covered).
- If you have a problem, there’s no way to contact GoFundMe, although you can use its “contact box” on the platform.
- Unable to withdraw money if you do not provide the platform with your social security number.
This is when you set up a page online or on your blog and then use the platforms to share your story to friends and followers about how you need money for a down payment.
Those interested can contribute the funds by using their credit or debit card.
It’s easy to use HomeFundIt. A person creates a HomeFundIt account and then they must complete an online application for mortgage prequalification.
If they are approved, they can build and promote a campaign, making them get closer to funding their down payment.
Feather the Nest
Feather the Nest allows you to receive funds that you can use toward a down payment by sharing your request for donations online.
The company is like a gift registry and allows for donations to be sent directly to a linked bank account.
Ideal for newlyweds and engaged couples, you can thus link the site to a website you create to get friends, family, and wedding attendees to assist you with a monetary gift to fund your down payment rather than them buying you a gift.
Since the money is considered as a gift, your lender won’t think the funds are derived from a home or personal loan.
We’ve seen the benefits, but crowdfunding platforms also have downsides.
GoFundMe collects a 2.9% processing fee plus 30 cents on each donation.
Feather the Nest charges a 5% transaction fee on every donation, and its credit card processing partner, Stripe, tacks on an additional 2.9% fee plus 30 cents per donation.
HomeFundIt does not charge transaction fees.
Pros and Cons of HomeFundIt
- Does not charge transaction fees.
- Widens who can make down payment contributions, allowing non-relatives (such as friends, co-workers, wedding guests, etc.) to give. Easy to make contributions; you can use a US debit card credit card.)
- Donators who use debit and credit cards for funding can only contribute up to $7,500.
- Plethora of paperwork.
Pros and Cons of Feather the Nest
- Raising funds is not just centered around weddings.
- Funds added to creator’s platform bring the creator one step closer to his or her home reno dream.
- Adding enough photos and videos can bring you closer to investors.
- Users register their dream nest by filling out a form detailing their project, adding photos or videos, and then sharing their goals with their personal network.
- Charges a 5% transaction fee on every donation.
- Its credit card processing partner, Stripe, tacks on an additional 2.9% fee plus 30 cents per donation.
- Some find website complicated.
Co-Ownership Agreement: Cher
Cher helps people get a mortgage by combining the borrowing power of roommates that renters use to help fund high rents and homeowner couples who both need to work to have the income to pay for their mortgage.
The company then sets up a co-ownership plan between you, the renters, and the couples, or, really, anyone, so you can co-own a mortgage and increase the odds of being approved for a mortgage.
Those involved may see this arrangement as a means of progress or advancement to getting their own mortgage down the road.
Pros and Cons of Cher
- Don’t have to settle or compromise by buying a fixer upper in an undesirable location.
- Co-owning is a stepping stone to buy a home by oneself.
- Ability to gain equity and tax benefits.
- As co-owner, you don’t have the same freedom over a property as with sole ownership.
- Cher charges a fee to the real estate agents at the close of escrow.
- Uses are vetted, which means you’re going to have a credit check.
Fractional ownership is a fairly new way for companies or other investors to buy a stake in your home if you can’t afford it. The company puts down the money, which the buyer can then use as a down payment, in exchange for a share of future profits.
So, if a company puts down 20% of the cost of your home, the company then will earn 20% of the appreciation of the home down the line. But it’s a big risk for investors if the house does not go up in value.
Here are two relatively new fractional ownership programs.
This real estate startup allows potential and qualified home buyers to buy a house with no down payment.
In this setup, the company buys the house that the home buyer has chosen using their own money and leases the house back to the home buyer in exchange for “purchase credits.”
The buyer can then work toward owning the house over two to five years, and after these years have passed, using the purchase credits that the home buyer has earned, the buyer then can buy the house from ZeroDown.
Much like a lease-to-own program, during those mandatory five years, the buyer potentially has the time to save money to cover the down payment (and more) while living in the house.
Pros and Cons of Zerodown
- You have flexibility to buy your home any time from 2 – 5 years after you began leasing it; this gives you time to earn credits and to prepare to officially become a homeowner.
- You’ll earn 0.25% purchase credits with each monthly payment, up to 15% of the home’s value after five years.
- You get to live in the home you chose and love without making a large down payment.
- This is not a traditional mortgage because ZeroDown isn’t a lender; it buys a house on your behalf and lets you lease it.
- While leasing, you are earning credits that ultimately allow you to buy the house on your own.
- You have to pay an upfront program fee of $10,000 to use the ZeroDown program.
- Currently, ZeroDown is only available in the San Francisco Bay Area; you can’t use this service to buy a home elsewhere in the US.
- You must lease your home for at least 24 months before you can begin the process of buying from ZeroDown.
- You lose out on real estate appreciation while leasing your home.
Rent to own Divvy is like ZeroDown. Buyers choose a house, a company purchases it and rents the home back to the buyer with the goal of the buyer eventually purchasing the home from the company.
The renter or buyer has to contribute an initial 1% to 2% of the home value. The renter then has thirty-six months to save up for a 10% down payment.
Divvy empowers potential home buyers to choose a property on their own that is available for sale rather than offering them a small selection of often unsatisfactory properties to choose from like most rent-to-own transactions typically do.
The major difference between Divvy and ZeroDown is the lease duration.
Pros and Cons of Divvy
- Applying for Divvy service is easy; most of the process and application is done online.
- No need to have excellent credit to qualify for the program.
- You can build your credit while renting.
- Can rent more than single-family homes; you can also rent to own townhouses and condominiums.
- Divvy charges a service fee of either $2,000 or 3% of the value of your home.
- Divvy is not offered in many states (but the company is expanding).
- If at the end of the agreed term you are unable to settle with Divvy, you will be forced to sell the house to meet your settlement obligations.
Common or Traditional Ways Around Financial Obstacles to Buying a Home
If you're not able to qualify for a mortgage on your own, you're not alone.
It's a common scenario many would-be homeowners face. However, many people take these common steps to getting around their financial hurdles.
Here are some of the most common methods.
Borrowing Money From Your Retirement Account
You may have heard friends and family members who've had to dip into their IRAs or 401Ks in order to come up with the cash for the down payment or to cover closing costs.
This is one of the most frequently used strategies that people use to come up with cash fast.
However, for the many people without retirement savings this is not an option at all. Furthermore, it's also not free cash.
The amount must be repaid in a given time period or it will be heavily taxed, not mention that you are taking out money for your future livelihood.
Borrowing Money from Family
Many parents with equity in their home or in the bank will gladly gift or lend their adult children the money to put money down.
Again, this is not an option for all as not all parents have extra equity they could give out not to mention the complex if not complicated relationships many people may have with their parents.
Sometimes, this reason alone can exclude borrowing from family as an option.
Nonetheless, it is one of the few tax-free and interest-free ways you might obtain the money.
Getting a Co-signer on Your Mortgage
Whether it be because of credit or income issues that preclude you from qualifying for a mortgage on your own, getting someone to co-sign on your loan could be just the ticket to buying a home.
Usually, this person is someone close to you such a parent or sibling.
What's more is that the co-signer doesn't normally appear on the deed or ownership doesn't have to be contingency on the table.
Utilizing one of the many government-backed state or federal programs is a popular way of achieving a home purchase.
These programs are specifically designed to help families that either don't have enough savings or income or less-than-stellar credit.
These programs can extend anywhere from assisting with down payments, to offering mortgages for applicants with not great credit or higher debt, mortgages with zero to little down payment, or mortgages with very low interest.
Whether it's through a program via FNMA (Fannie Mae) or FHLMC (Freddie Mac), FHA, VA, or USDA loans, a lot of the qualifying process and getting a mortgage works very similarly.
Even many of the private non-profits that help first-time homeowners actually get their loans or funding from these programs.
In today's society, people are coming up with more innovative ways to make owning a home a reality in the U.S.
Many Americans are not even aware of the numerous federal and state-backed programs that are there to assist people who may not qualify for a traditional mortgage; much less the private and tech-related options that are out there now.
With enough research and open-mindedness to thinking outside the box, purchasing a home could be more than just a dream.
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