One of the biggest mistakes potential homebuyers can make is assuming they cannot qualify for a mortgage. There are numerous unconventional home loans available to make buying property possible for more consumers. You may qualify for these loans even without the perfect credit or the money for a large down payment. 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, often 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.
How Does A Non-Conforming Loan Work?
Fannie Mae and Freddie Mac are financial firms that are sponsored by the government and invest in mortgage loans. The Federal Housing Financing Agency sets rules as to what kind of mortgages they can buy. Any loans that conform to these standards are called non-conforming loan. They are typically too large, or don’t meet a specific requirement set by the FHFA.
Conventional Vs. Unconventional Loans
One of the main differences between conventional and unconventional loans is the credit score and down payment they 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 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 payments. 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.
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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. 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. “VA Loans can put you in a home close to military bases to give you a constant interaction with other members of the military,” says Cliff Auerswald, President of All Reverse Morgtage, Inc.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. 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.
Holding Mortgage: A holding mortgage is similar to seller financing, in that the previous owner acts as a lender. However, in a holding mortgage the previous owner holds on to the title until the new loan is paid in full.
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.
Jumbo Loans: Jumbo loans are loans that are too large for Fannie Mae or Freddie Mac to back. This might sound intimidating, but there’s good news: interest rates for jumbo loans are usually comparable to traditional loans. To qualify for a jumbo loan, you’ll need to meet stricter qualification criteria set by the lender.
Purchase Money Mortgage: Purchase money mortgages are another option used directly between buyers and sellers. With this arrangement, buyers essentially use a loan from the seller to buy the property. It is most common when buyers do not meet other financing requirements.
Benefits Of Non-Conforming Loans
Non-conforming loans offer a myriad of benefits, including:
Low down payment requirements: In general, non-conforming loans have relatively lower down payment requirements. If you qualify for a USDA or VA loan, you don’t even have to make a down payment.
Better loan limits: If you want to buy an expensive property, you’re in luck, because you can access a jumbo loan. This type of non-conforming loan offers higher loan maximums relative to conforming loans.
Access to more property types: Because non-conforming loans are less strict in terms of loan terms, down payments, and maximums, you instantly widen your possibilities for what type of property to buy.
Less stringent credit requirements: If you have a low credit score, or have negative marks on your credit score, luck may be in your corner. Non-conforming loans have less stringent requirements. You might get approved even if you have a bankruptcy in your history. However, keep in mind that you’ll almost always pay more in interest for these types of loans.
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 are in the 500’s.
“Unconventional loans are usually based on your own credit history and property values, so you can get a large loan based on your merits,” says Dave Herman, President of EZ Surety Bonds.
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, 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
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.
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.
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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:
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 making a decision.
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.
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.
Today’s economic landscape can make maintaining perfect credit and saving up 20 percent for a down payment challenging 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, buyers will have access to more flexible, creative options by considering unconventional home loans. These unique financing methods have enabled countless individuals to achieve their goals of homeownership.
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