Since the banking changes that swept the industry post-2008, home buyers have more options than ever to explore non-traditional sources of money outside the traditional banking channels. These options are known as “creative financing” or “alternative mortgage lending.”
A traditional bank loan often looks like a term sheet and a rate with very few options for the buyer. Creative financing from non-banking lenders creates many different avenues for buyers to come to closing, often with as little of their own money as possible.
Typically these lenders don’t take deposits and the funds are not FDIC-insured. Sometimes they are sourced from licensed mortgage bankers that act as direct lenders, or individuals engaged in “hard money” loans.
What are the different types of creative financing?
Are creative financing, alternative mortgage lending, ARMs, and hard money loans leaving you a little confused?
At the end of the day nothing replaces solid advice from a trusted Realtor and professional financial advisor. However, there are several topics to consider researching online for yourself to become fully informed of ALL the options available to you.
ARMs or Adjustable Rate Mortgages are an avenue to keep buyers’ interest rates low for a certain amount of time. ARMs don’t require the traditional 20% down payment—the minimum down payment is as low as 5%. The interest rate is fixed for a term of 3, 5 or 7 years, and the rate is lower than a conventional loan.
Now the risk you take with ARMs is that after the fixed term expires, the interest rate could go up and become unaffordable. (The opposite could also be true, but interest rates are unpredictable.) But for people who aren’t going to live in a home long-term, ARMs can offer real benefits: a lower required down payment and a lower interest rate. This could be a great option for, as an example, a couple who know they will be transferred in five years for work. They can enjoy a lower payment while they’re there.
VA loans are mortgages for veterans or active military and require zero down. Plus, they require no monthly mortgage insurance, helping buy more house for less money. 100 percent of the closing costs can come from a seller concession or via gift funds from family. Those with current and former military service are likely eligible. These loans are offered by most lenders across the country.
Rural loans or Rural Development Loans, otherwise known as the “USDA loan program,” is offered by the United States Department of Agriculture (USDA). These loans feature 100% financing with no down payment. A huge benefit is that the buyer also pays no mortgage insurance.
These loans have restrictions on maximum income and also some geographic limitation. The loans are backed by the USDA and offered by most mortgage providers nationwide. The program is not for farms, but for typical single-family homes that happen to be in less-dense areas. In the Central Kansas area many suburban cities such as Mulvane, Andover, Andale, Clearwater, Rose Hill are included. Visit the Kansas section of the USDA site for more info.
FHA mortgages typically only require 3.5 percent as a down payment. But most first-time buyers don’t know that the down payment, just like with a VA loan, can be sourced from a financial gift. There are also down payment assistance programs that buyers may be eligible for.
Down Payment Assistance (DPA) programs are growing more popular by the day. Government-run programs, plus approved non-profits, offer gifts and no-interest loans to support home ownership in select communities. Nearly 90 percent of all single-family homes in the U.S. are eligible for some kind of DPA according to a study by RealtyTrac. All the major loan types mentioned above allow the borrower to apply DPA funds toward the required down payment, if any. In some cases, the DPA funds may also be applied to closing costs.
Piggyback loans, also known as 80/10/10 or 80/15/5 loans, are best suited for those with good credit and at least 5 percent down. They are financial tools that help homebuyers who don’t have the traditional 20 percent down payment when applying for a mortgage. They often require between 5 and 10 percent down.
A typical piggyback scenario looks like this: 80 percent first mortgage, 10 percent second mortgage, 10 percent down payment. The big advantage is that this eliminates the need for mortgage insurance.
Hard money loans or bridge loans are basically short-term loans that real estate investors can use for quick financing. This has become a popular technique for investors whose goal is to renovate property, then flip or sell it for a profit. One of the main attractions is that hard money financing isn’t determined by a buyer’s credit but ultimately the value of the property itself. However, hard money loans aren’t a perfect financing solution due to an often high cost and a short time window for repayment.
What are some places besides traditional banks that offer home loans?
Online mortgage lenders: The rise of online lending has provided more people access to the money they need to buy a home. It’s now possible to quickly compare mortgage rates and terms and find lenders that fit your needs.
Credit unions: Though they work similarly to traditional banks, credit unions are often overlooked by borrowers. Although there are often membership restrictions, you may be able to join a credit union through your employer, your geographic region and even through family. With good credit, it’s possible to find lower rates than traditional banks.
No matter which mortgage lending route you choose…
… remember that bankers and non-traditional lenders ultimately want to start a relationship and offer both traditional and alternative paths to home ownership. Our view is that it is critically important to consult a financial professional about your unique situation. Lenders can provide you with solutions but it is important to know the true pros and cons of that solution.
Also, team with a knowledgeable buyer’s agent. A local buyer’s agent works for you to help understand the current market and what alternatives may be available for you in your search. It is not only the best way to find a wonderful home, but also to ensure that you are paying the right price and making sound decisions.
In Wichita, Madrigal Team Gold has professional buyer’s agents who will work with you to identify opportunities to find the path to your dream. If you’re considering buying a new home, then please contact us today as part of your due diligence.
