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5 Alternate Financing Options Every Homebuyer Should Consider
Not all homebuyers have the credit history or the money needed to qualify or put toward a down payment for a mortgage with decent terms. Fortunately, traditional mortgage loans are not the only options. There are a number of different programs available that can help homebuyers secure a mortgage with good terms. The following are five such alternate financing options:
1. VA Loans
If you are currently serving in the military, are a military veteran or are the spouse of a veteran killed in the line of duty, then you may be able to qualify for a VA loan. VA loans, which are guaranteed by the U.S. Department of Veteran Affairs, allow lenders to offer beneficial mortgage terms. You’ll find few financing options with as many benefits as the VA loan. Not only is no down payment required, but poor credit and even a previous bankruptcy won’t disqualify you. Additionally, you won’t have to pay for mortgage insurance.
2. FHA Loans
Federal Housing Administration loans are home mortgage loans that are insured by the FHA. Lenders that participate in the program are protected by the mortgage insurance that you will be required to pay in case you default. The insurance is what allows lenders to offer FHA loans with terms that are favorable to the homebuyer, such as low interest rates and less strict qualification requirements.
As long as your credit score is at least 580, you’ll only be required to pay a down payment of 3.5 percent. However, if your credit score is between 500 and 579, you’ll need a 10 percent down payment. If your credit score is below 500, then you won’t qualify for the loan. In addition to the low down payment, some lenders will even pay some of your closing costs for you as well, although this will typically result in a higher interest rate.
3. USDA Loans
A loan that is issued and guaranteed by the U.S. Department of Agriculture (USDA) is known as the Rural Housing Loan. Although primarily used to finance rural real estate, USDA loans can be obtained for suburban-area homes as well. Their main goal is to provide low-income buyers with the means to purchase a house. No down payment is required and interest rates are often as low as 1 percent. However, you will have to pay for mortgage insurance.
To qualify for a USDA loan, the mortgage payment (which includes the principal, interest, taxes and homeowner’s insurance) can’t exceed 29 percent of your monthly income, nor can your debt-to-income ratio exceed 41 percent. If your credit score is above 660, however, the USDA will consider your qualification even if you don’t meet these debt-to-income ratios. You’ll also need to prove you’ve had 24 months of dependable income, and you must have an acceptable credit history.
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4. HomeReady Mortgage
HomeReady mortgages, backed by Fannie Mae, are available from almost every lender. Because these loans were designed specifically to help multi-generational households get approved more quickly, the HomeReady mortgage factors in the household income, not just the individual income of the person applying for the loan. For example, if you are currently living with your parents, but you have good credit, a good job and money saved up, you could use your income as well as that of your parents to apply for the HomeReady mortgage.
In addition to the unique benefit of being able to apply using a household income, the HomeReady mortgage requires very small down payments. For a single-family home, you’ll only have to put down 3 percent; for a manufactured home, you’ll need 5 percent. The interest rates are typically low as well. You will have to pay for mortgage insurance, however, if your down payment is less than a 20 percent.
To qualify for a small down payment HomeReady loan, you’ll need a 680 credit score and a 36 percent debt-to-income ratio. You may also qualify for low down payment options if you have a debt-to-income ratio of up to 45 percent as long as you have a credit score of at least 700.
5. Piggyback Loans
A piggyback loan is a unique form of mortgage that allows you to pay as little as 10 percent on your down payment without having to pay a high interest rate or mortgage insurance. The way it works is that you pay for 10 percent of the home’s cost with your down payment. You’ll then finance 80 percent of the total cost using a traditional mortgage loan. The remaining 10 percent will then be covered by a second mortgage taken through the Home Equity Line of Credit (HELOC). Piggyback loans are particularly helpful for homebuyers looking to borrow a significant amount of money for an expensive home.
The traditional means of obtaining a home loan isn’t your only option as a homebuyer. These are five of the alternate financing options that you might want to consider when it comes time to apply for a home mortgage.