One of the biggest mistakes, potential homebuyers can make is assuming that they cannot qualify for a mortgage. There are numerous unconventional home loans available to make buying property possible for more consumers. Even without the perfect credit or the money for a large down payment, you may qualify for these loans. Read on to find out what constitutes a non-conventional loan, how to qualify, and pro tips on how to proceed if you want to buy a home with a non-conforming loan.
What Is An
Unconventional Loan?
A
non-conventional loan, or mortgage,
is a type of loan that does not have to follow traditional mortgage loan
requirements. Non-conventional loans sometimes refer to non-conforming loans.
Conventional (or conforming) loans use wide sets of qualifications and
eligibility, such as credit scores, loan amounts, and debt-to-income ratios.
Also, most conventional loans require a 20 percent down payment minimum or
private mortgage insurance payments.
Non-conventional
home loans offer more flexible qualification requirements, oftentimes because
the government has backed them. The Federal Housing Administration, the U.S.
Department of Veterans Affairs and the U.S. Department of Agriculture are all
federal agencies that ensure these non-conventional loans to encourage
homeownership.
Conventional Vs.
Unconventional Loans
One
of the main differences between conventional and unconventional loans is the
credit score, and down payment they require. Private Hard Money lenders offer
conventional loans and require buyers to have an excellent credit score.
Conventional
loans are either fixed-rate or adjustable. Fixed-rate mortgages’ interest rates
will not change. Adjustable-rate mortgages often begin with a lower interest
rate and lower monthly payments. However, a change in property taxes or your
homeowners’ premium results in an increased interest rate.
Government
programs back unconventional loans and have lower credit score requirements and
larger down payment. However, the loan limits of unconventional loans are also
lower.
The
two main types of government-backed unconventional home loans include FHA and
VA loans. The government ensures FHA loans allowing for lower requirements to
obtain these loans. Veterans Affairs Loans (VA) are reserved for military
members and their families. These loans may allow for no down payment, but
ultimately the VA will handle the approval process.
Types Of
Unconventional Loans
Depending
on how long you have been in the real estate industry, you have likely heard of
various non-conventional loans. These loans have atypical approval
requirements. Read through the list below to familiarize yourself with the
various types of nonconforming loans available:
·
FHA: Loans secured by the Federal Housing
Administration is one of the most popular non-conforming loan types. This is
because of the low-down-payment requirements. Moderate-income homebuyers can
benefit from these loans, but they include some credit score guidelines. The
application process of FHA loans is universally accessible because most
mortgage providers issue them.
·
USDA: The U.S. Department of Agriculture backs
USDA loans with the intention to develop rural areas. Loan applicants must be looking
at property in a town with less than 20,000 inhabitants to be eligible. Other
requirements include a stable income and a credit score of at least 640. Also,
the property must be the borrower’s primary residence.
·
VA: Active-duty military personnel and
certain veteran groups can apply for a VA loan through the U.S. Department of
Veterans Affairs. One of the biggest benefits of this loan type is that they do
not require a down payment. Read this article to learn more about VA loans and how to apply.
·
Crowdfunding: Crowdfunding is arguably one of the most
interesting developments to come from new technologies in the real estate
industry. The process refers to raising money for a property from groups of
people rather than a single loan. The breakdown of homeownership will vary
depending on the stipulations established at the time of fundraising; however,
this is an interesting option for investors and even first-time homebuyers to
consider.
·
Seller
Financing: This arrangement
involves loaning the money for a property directly from the previous owner, who
is selling the home. This non-conventional setup is attractive because it can
allow homebuyers to bypass strict mortgage requirements. However, it is often
in exchange for higher interest payments. Often, the properties do not
advertise seller financing, so do not be afraid to ask. Make sure you have a
concrete pitch when you do.
·
Private & Hard Money Lenders: Private and hard money are two of the
most common sources of financing among today’s real estate investors. This
route involves finding an investor to act as a lender and finance a property;
as the buyer, you would pay back the loan with interest directly to the lender.
Again, this nonconforming financing method is a great way to work around
potentially stricter mortgage approval requirements.
How To Qualify For An
Unconventional Mortgage Loan
Non-conventional
home loans facilitate homeownership opportunities for individuals who may not
qualify otherwise. You will find easier requirements with these loans than
their conventional counterparts. Down payment requirements for non-conventional
mortgages can be as low as three percent, while acceptable credit scores in the
500’s.
It
is important to note that the specifics of non-conventional mortgages will vary
from type to type. Keep in mind that not everyone will qualify for every type.
Some non-conventional loans include demographic limits, such as eligible
military veterans and their families or low-income homebuyers in rural areas.
As
mentioned earlier, loan products that do not conform to conventional loans’
requirements are considered non-conventional mortgages as well, even if the
federal government does not back them. According to NerdWallet.com,
nearly half of home loans are now provided by alternative mortgage lenders.
This shows that the demand for non-conventional home loans is significant and
growing.
Investors
hoping to secure non-conventional home loans can rely on the performance of
other properties when raising funding. Depending on the loan’s source,
investors can present numbers from past real estate transactions to establish
rapport with lenders. Different non-conventional loan types will fit into three
main sources: online lenders, marketplaces and brokers, or non-bank lenders.
Investors should frame their approach depending on the source of the potential
loan.
Online Mortgage
Lenders
Chances
are, you have seen at least one commercial for Rocket Mortgage on the
television. Quicken Loans launched
Rocket Mortgage – one of the most substantial companies in a new generation
of online mortgage lenders. Online lenders are offering consumers mortgage and
refinancing approvals in a matter of minutes, using loan-decision algorithms.
These unconventional mortgage programs appeal widely to millennials, today’s
largest group of homebuyers, who prefer to shop for products online and receive
instant gratification.
Marketplaces And
Brokers
Like
the concept of online mortgage lenders, many popular sites such as Zillow or
LendingTree offers consumers a list of potential loan products to choose from.
An algorithm performs a search that takes the shopper’s basic information and
matches nonconforming mortgage rates
and products that lenders offer. The consumer then selects their preferred
product and works directly with the lender to finish processing the
application. In turn, these marketplaces, and brokers, which can be thought of
as middlemen, receive a fee for providing lenders with leads.
Non-Bank Lenders
Small
lenders and credit unions provide an alternative to home buyers who have
less-than-perfect credit. Because these entities often do not face as many
federal regulations as their counterparts, the banks can provide more flexible
options to consumers. As a result of the housing crisis, many big banks have
decreased their roles in mortgage lending, limiting their products to the most
qualified borrowers. In recent years, non-bank lenders have increasingly filled
this void.
How To Buy A Home With
An Unconventional Loan
It
is easy to get discouraged when you want to buy a home but cannot see the light
at the end of the tunnel when paying off debt or saving up enough funds for a
down payment. However, it should be known that non-conventional mortgage loans
have become increasingly popular, making homeownership more accessible to those
who cannot or do not want to take out a conventional mortgage. Follow the steps
below if you are interested in buying a property with a non-conforming loan:
1. Compare online mortgage lenders: Online lenders tend to offer flexible
product options, compared to their brick-and-mortar counterparts. Spend time
comparing online mortgage lenders that provide loans for lower credit scores or
require a lower down payment. It should be noted that interest rates will often
be higher, and shoppers should mind their due diligence and perform thorough
research before deciding.
2. Meet with a credit union: Credit unions are oft-forgotten by
borrowers. Still, they are institutions that often offer great deals when
compared to traditional banks, especially if you are a long-time member. Sit
down with a representative with your credit union and go over their lending
programs, including first-time home-buying programs, and you may be able to
obtain great terms.
3. Identify an alternative solution: New home buyers should not automatically
write off traditional lenders and should always sit down for a meeting at the
very least. In some cases, a lender may be willing to work with home buyers to
develop a creative solution, such as offering to combine a graduates’ student
debt with their mortgage payment or increasing the loan-to-value ratio on the loan.
For more alternative solutions, review the non-conforming loan types listed
above.
Summary
Today’s
economic landscape can make maintaining perfect credit and saving up 20 percent
for a down payment a challenge for many aspiring homeowners. The burden of
student loans, skyrocketing costs of living, and ever-increasing property
values can make the goal of homeownership seem even farther away. However, by
considering unconventional home loans, buyers will have access to
more flexible, creative options. These unique financing methods have enabled
countless individuals to achieve their goals of homeownership.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Tel: 623-582-4444
Level4Funding.com
Private
Hard Money Lender
Dennis@Level4Funding.com
Who is this Dude? Dennis brings with him
substantial experience in residential real estate. Dennis has extensive
experience purchasing, renting, and selling numerous homes over the past 45
years. His first purchase was a property in California when he was 18 years
old. Dennis graduated from California State University Pomona with
majors in Computer Science and Business Management. He is a Licensed Mortgage
Broker, Licensed Mortgage Originator, Licensed Real Estate Agent, Licensed
Insurance Agent Certified Sort Sales Specialist (CSS), Certified Negotiator
(CNE), and FAA Licensed Private Pilot.
