Unconventional Home Loans For Buyers And Investors

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One of the biggest mistakes potential homebuyers can make is assuming that they cannot qualify for a mortgage. There are numerous unconventional home loan options 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 they have been backed by the government. 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 that they each require. Private 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 payment. 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 at all, but ultimately the VA will handle the approval process.


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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 are 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 highly 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. In addition, 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 set up is attractive because it can allow homebuyers to bypass strict mortgage requirements. However, it is often in exchange for higher interest payments. More often than not, the properties do not advertise seller financing, so don’t 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 then 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 family, or low-income homebuyers in rural areas.

As mentioned earlier, loan products that do not conform to the requirements of conventional loans are considered to be non-conventional mortgages as well, even if they are not backed by the federal government. 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 with mortgage and refinancing approvals in a matter of minutes, using loan-decision algorithms. These 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

Similar to the concept of online mortgage lenders, many popular sites such as Zillow or LendingTree offer 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 it comes to 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 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 those with 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 making a decision.

  2. Meet with a credit union: Credit unions are oft-forgotten by borrowers but 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 come up with 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.

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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 an unconventional home loan buyers have access to more flexible, creative options. These unique financing methods have enabled countless individuals to achieve their goals of homeownership.

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