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Despite a challenging market, demand for homes remains high because Americans know buying a home is still a rock-solid investment. Over the past decade, home values have far outpaced inflation: while home prices have increased 63 percent since 2013, inflation has increased 34.7 percent.
Financing, however, remains a common sticking point for many prospective buyers. Mortgage rates have been prohibitively high, though the rate for a 30-year fixed mortgage was hovering around 7 percent as of Tuesday. Regardless, many buyers who haven’t been able to qualify for a conventional mortgage are getting creative as they look for a cheaper alternative.
Around 20 percent of U.S. borrowers have used alternative financing methods for their home purchase, according to findings from Pew. Of those buyers, 22 percent have used alternative financing on multiple home purchases, suggesting there’s a significant and durable demand for unconventional financing.
For real estate agents, highlighting diverse financing options is one of the easiest ways to attract more traffic to their listings. Here are a few programs and options to know about.
Editor’s Note: Remember that real estate agents are not loan officers or mortgage professionals. Consult a trusted mortgage professional and your broker to make sure you are providing the best education and advice to your clients.
Down payment assistance
Down payment assistance programs are some of the most popular financing assistance options. These programs can help cash-strapped buyers push their sale over the finish line with a much-needed cash infusion.
Not every buyer qualifies for assistance, though. These programs are usually aimed at first-time homebuyers and non-investors who must meet various prerequisites and qualifications.
Many buyers don’t know about these programs, and those who do may not realize that assistance often takes the form of grants — which they don’t have to repay — zero-interest loans, or loans that will be fully forgiven if they live in the home for a certain period of time.
There are also programs, such as Fannie Mae’s HomePath Ready Buyer, which provides up to 3 percent financial assistance toward closing costs to qualified first-time buyers, as well as other benefits. Other than the eligibility criteria, the only requirement is that recipients complete a home buyer education course.
Real estate agents don’t have to highlight these programs in their actual listings. Marketing experts suggest posting articles, blog posts or information sheets on their websites as a highly effective way to attract potential buyers.
Government-backed mortgage programs
These mortgage programs can be tremendously helpful for buyers who qualify because they often come with relaxed credit score requirements and low or no down payments.
The U.S. Department of Agriculture loan is only available to buyers in certain geographic regions designated as “rural” by the USDA. For the purpose of this mortgage program, most of the U.S. falls into this category.
These loans come with no down payment, reasonable mortgage rates, and very generous credit requirements. If you have listings in qualifying areas, highlighting this financing option is a no-brainer.
The Veterans Affairs loan is available to veterans, active-duty military personnel, and their spouses. Buyers who meet these qualifications get a government-backed loan with little or no down payment and very generous credit score requirements or none at all.
Finally, Federal Housing Administration loans are backed by the government and are a favorite choice among first-time homebuyers. Like other government-backed loans, FHA loans have down payment options as low as 3.5 percent and favorable credit score requirements, although they come with requirements related to the purchase of FHA mortgage insurance.
Seller-financed mortgages
This arrangement is essentially the same as a bank mortgage, except the seller acts as the bank. Ownership of the home is transferred to the buyer, who then makes payments directly to the seller.
While this setup can be a simple and expedient way to sell a home, it doesn’t give the buyer as many legal protections as a conventional bank-issued mortgage. Additionally, seller financing usually comes with a mortgage rate that’s much higher than a conventional mortgage.
If you’re a real estate agent who has a seller willing to entertain this kind of financing, make sure both parties understand exactly what they’re getting into.
Balloon mortgages
This somewhat obscure type of mortgage upends the typical monthly payment schedule. With a balloon mortgage, there are either very small monthly payments or none at all for a specified period of time. At the end of that term, a large sum, or balloon payment, is due.
House flippers often use these loans because they’ll likely have sold the home by the time the balloon payment is due. This loan can also work for buyers who are due to receive a large sum of money in the near future, such as an inheritance, work bonus or insurance payout.
Rent-to-own or lease purchase agreement
This setup is similar to a seller-financed mortgage, with one crucial difference. In a seller-financed mortgage — as well as a conventional mortgage — ownership of the home is transferred to the buyer at the beginning of the agreement.
In a rent-to-own or lease purchase agreement, the buyer only receives the deed to the home after they’ve made a certain number of payments and exercised their purchase option.
This means the buyer will be a tenant for the first few years they’re in the home, with no ownership rights or access to equity. During this period, a portion of their monthly payment goes toward the down payment.
Eventually, the buyer will be able to exercise their right to purchase the home, but nothing is guaranteed. The buyer will have to apply for a conventional mortgage, and if they fail to qualify, they have little or no recourse and may not be able to recover their money from the seller.
One of the main concerns is if the home appreciates significantly during the rental period, the renter may not be able to afford the mortgage. Still, this can be a viable option for buyers who can’t yet pull together a down payment or need time to improve their credit score to qualify for a mortgage.
Luke Babich is the CSO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
