4 Ways to Buy a Home Without a Mortgage
Would you like to become a homeowner?
Looking to buy a second home as an investor? Purchasing a home is a big decision and a considerable financial commitment, and can be tricky qualifying for a mortgage from a traditional lender if you haven’t saved enough for a down payment (even more $ if you’re looking to purchase a 2nd home), or if your credit score is too low.
Fortunately, you have other options…
If you don’t qualify for mortgage financing or are simply curious about other options, here are four alternate routes to purchasing a home without a traditional mortgage.
1. Rent to Own
If you’re an investor, this is a good option for your tenant if you’re wanting to sell, but haven’t had the movement you’re looking for in the sales market. Perhaps you have a great renter who is “almost there” – this could be a great option!! In a slow market, a rent-to-own property may sell easier, while receiving the benefits of having a rental property, like additional income and tax deductions.
The main benefit of a rent-to-own agreement is that you’re giving your tenant time to rebuild their credit score. At the end of the term, you can apply their rent credits and deposits and apply towards the purchase of the home.
2. Get Owner Financing
Similar to RENT TO OWN, Owner/Seller Financing is another great option if financing is not available to the tenant. This means the tenant finances their purchase with you, the seller, rather than the bank, and makes their monthly mortgage payments to the you.
Any real estate transactions should be documented in writing, so you the seller and buyer should create a Real Estate Purchase Agreement to facilitate the sale and outline the payment details. In many cases, the seller will wait to transfer the property title until you have made your final payment, at which point they can use a Warranty Deed to transfer legal ownership.
3. Get a Private Loan
If your credit score is too low to qualify for a traditional mortgage, you may have better luck with an investment lender or a peer-to-peer lender. While private lenders are less risk averse than banks, keep in mind they will likely charge you a higher interest rate (12-20%) to account for the higher risk of lending to you.
A more attractive option, if possible, is to borrow money from a family member or friend. It can be awkward to ask a loved one for such a large sum, but private home loans can be beneficial to both of you. While you will likely be able to negotiate more flexible payment terms and a lower interest rate with a family member than with a bank, your family member could potentially earn more interest off your loan than with other types of investments.
Even if you have a close relationship with the lender and trust each other, it’s still important to think of this arrangement as a business deal and protect yourselves with a written contract. A Promissory Note should be used to document the terms of the loan, including payment frequency, payment amounts, and how long you have to repay the money.
The lender should also draw up a Mortgage Agreement (or Deed of Trust, depending on your jurisdiction), which will put a lien on the property to secure the loan. The lien gives the lender the right to foreclose on the property if you fail to repay them. Once you repay the loan, the lien is removed.
4. Pay Cash
The last option is the simplest: pay for your home in cash. Making a cash purchase can save you money in the long run, particularly on closing costs and interest payments on your loan. Even better, you can enjoy being debt free and unburdened by monthly mortgage payments.
A cash purchase also has advantages for the seller, particularly if there is a bidding war and they want to make a quick sale. A cash offer also means they don’t need to worry about the buyer backing out of the sale because they are denied financing.
Of course, saving for a cash purchase is easier said than done, and you certainly do not want to put your entire savings into buying a home outright, at the risk of running into financial troubles down the road. Unless you have already accrued significant savings or just had a windfall, you will need to establish an aggressive saving plan, or consider one of the previous options.