When buying a home, it’s easy to get stuck in conventional modes of thinking and follow a prescribed and recommended path.
This is especially true when it comes to getting a mortgage, and more so in the aftermath of the credit crunch. Banks are less willing to go outside the box and get you into a home–the burden is on you to make it work.
The continued availability of instruments like buy-to-let mortgages in the UK (check out this buy to let mortgage calculator) shows that banks are still flexible in their willingness to fund purchases. Where they are not, there are still opportunities to buy homes in unconventional ways.
How to Dump the Bank
Let’s take a look at a few of those alternative options:
- Assuming the Mortgage. If the mortgage agreement on the home permits doing this, you can often “assume” responsibility and payments on the existing mortgage. Of course, the original owner needs to be compensated for the equity they have in the home, and the new agreement would spell out how and when this would be done.
- Shared Ownership. This qualifies among the riskiest financial moves, but is sometimes the only option for people determined to buy a home. Shared ownership can involve (by presumed order of risk) family, friends or complete strangers. The purchase agreement should spell out things like the share of total expenses, decision-making on improvements and repairs, and the procedure for eventually getting out of the deal.
- Seller Financing. Instead of getting bank financing, buyers can sometimes use the seller as the financing party in the deal. A contract for the sale of the home is still drawn up, but in this case payments are made directly to the seller over time. This benefits the buyer because they can avoid the mortgage underwriting process, and the seller because they can successfully sell their home and collect interest payments over time.
- Third Party Financing. This is similar to the method above, except that the purchase is financed by a third party instead of the seller. Buyers with well-capitalized family or friends can sometimes turn to this method and have someone they know play the role of the bank. A word of caution: Foreclosing on a friend or family member can ruin your relationship for a good, long time. If you decide to go down this route, do so carefully.
- Rent-to-Own. This is typically a rental agreement that also specifies the option to buy the home. The contract might call out things like the price of the home, and how long you can live in the house before you have to make a decision. It will also specify the percentage of the monthly rent that goes toward your eventual down payment. Rent-to-own agreements can be useful for people who are working to improve their credit, save money for a down payment, or want to “test-drive” a home before committing.
- Securities-Backed Mortgage. This is a financing method that hands over control over some of your investments to the lending institution as collateral. The lender holds on to your investments for the duration of the loan or some other agreed-on time frame.
What’s Next for Us?
We personally want use a traditional 30-year mortgage for financing, but many of these other options are possible and available to a wide range of borrowers who might not otherwise qualify for or want a traditional mortgage product.
- Leave a comment about other unconventional buying methods you know of to help your fellow readers!
- Make sure you’re following Fiscal Fizzle to get regular updates on our quest to buy a home.