4 Financing Options for Buying a Home

Purchasing a home is a substantial investment and a significant emotional and financial decision to make. If you have a stable income source and you are ready to establish roots, it shouldn’t be a problem. But just as there is not one home that is right for everyone, there are also various ways to finance your dream home purchase. From a traditional home loan to seller financing, there are different home financing choices that you can take into consideration. Here are 4 financing options for buying a home that are worth considering.

Applying for a Traditional Mortgage

Traditional mortgages are the most preferred home financing options. Mortgage lenders like credit unions or banks usually need you to have a credit score rating of at least 620 as well as a debt-to-income ratio that is less than fifty percent. The down payments can vary, and you will most likely need to have private mortgage insurance if you are putting down less than twenty percent.

Generally, traditional loans tend to have pricier out-of-pocket expenses, but lower borrowing costs over the period of the loan. They are a suitable choice for homebuyers that have strong credit scores, promising employment history, and substantial savings. For those who do not have strong financial health, it is worth looking into bad credit loans as an option.

Government-issued Loan

It is worth checking if you are a candidate for a government-issued loan, if you do not qualify for a traditional loan. Local and state governments also provide homebuyer programs with down payment assistance, discounted rates, closing cost assistance, and tax credits.

However, you will need to have a credit score of at least fifty to be eligible for such programs, and you will need to offer additional documentation to demonstrate your eligibility. A requirement would also be to have mortgage insurance. The more flexible down payment requirements of government-issued loans, makes them a good option for prospective homeowners with low savings.

Inquire About Seller Financing Options

You might find this surprising, but motivated sellers are sometimes willing to relinquish a formal lender. Some might even offer to lend you the cash themselves, which means you will be paying them directly for the mortgage instalments. Seller financing usually comes with a higher interest rate with a substantial down payment, or it might stipulate a balloon payment in a few years (usually five years).

This option is perfect for home buyers that are not eligible for conventional financing options and sellers that have fully paid-up property. Just make sure you read through the seller financing terms thoroughly since it could be risky. The sellers and attorneys often recommend stern default consequences for the purchaser.

Rent to Own

Renting might not be what you had in mind as a prospective homebuyer, but a rent-to-own transaction is a practical last resort. Contingent on the arrangements, you can stay in the house as a tenant for an agreed-upon period while building up enough savings and improving your credit sufficiently to afford the property on your own. Some sellers might permit you to pay a portion of the purchase price with the rent each month to help you reach your goal sooner.

You may have to pay a once-off upfront amount called “option money”. This typically ranges between two and seven percent of the home value which might or might not go towards the home sale. Bear in mind that you risk losing both the option money and the purchase credit you have paid if you decide you won’t be buying the house after all.

Conclusion

Purchasing your first home is a thrilling milestone for most, but getting the finance you need, could be an uphill battle and leave you feeling overwhelmed. I hope these four financing options for buying a home have given you some ideas on which choices would be the most fitting one for you.