In most countries, buying a home requires some type of home finance action. There are many different ways to finance a home, and because the home is such a major expense to most people, financing is the only way for many to gain home ownership. It is an acceptable, time tested, and valuable way to buy a home. For creative buyers, there are many options to look at when purchasing a home.
Having good credit is pretty much essential to obtaining financing, however, there are other options for those with minimal or even bad credit. Having bad credit costs more money in the long run, with higher interests rates, and fees. It is the penalty for being a bad money manager. Getting good rates is a reward for being reliable and trustworthy in the eyes of the lender.
Types of Loans for Home Finance
1. Borrowing from friend or family
This is a possibility, but can be painful to the ego. Be sure to get legal documentation for everyone’s peace of mind.
2. Using a co-signer or joint ownership
Another way to obtain a mortgage if you have bad, poor, or no credit history. The major risk is to the co-signer, who is responsible for the entire amount if the other person defaults.
3. Land Contract
This is a great way for someone to get a first mortgage. Usually, the seller wants a sizeable down payment, and will carry the loan with interest. Good for the seller because they can get good interest rate. Good for the buyer who may not qualify for other mortgages.
4. Seller Financing
Another creative financing tool. Similar to the land contract, the seller is the lender. It is a way for the seller to have ongoing income over many years with interest.
5. Conventional Mortgage, fixed rate
This is the typical mortgage, over 15 or 30 years in most cases. Rate is fixed, which is good in times of inflation. This is probably the most desirable type of financing to try to get.
6. ARM, Adjustable or Variable Rate Mortgage
The ARM is a problem when inflation goes up, because your monthly payment can become very expensive when pegged to inflation.
7. Balloon Mortgage
This can become a problem when the balloon payment is due. Usually set up with payments for five years, then the entire balance becomes due. It is good for those who are not going to be in an area for more than the five years. Can be a real problem when inflation hits and home values decrease.
8. Rent, Option to Buy
This is like a seller finance program, but you rent for a few years, and then it converts to a purchase agreement or you move. Part of the rent that has been paid applies as a down payment. It is a good way to raise a down payment when you do not have it.
9. Option ARM, pay all, interest, or part interest
This is another more risky plan. You can pay the entire payment, just the interest due, or only part of the interest due and the balance gets added to the end of the contract.
10. Interest Only Mortgage
This is like a balloon mortgage. You pay only interest, and never decrease the principal.
11. Assume Mortgage
If seller is willing, you can take over payments. Get documentation and contracts. You pay the seller, and they continue to pay their lender the mortgage payments. It can be helpful in hard times when homes are not selling and it is difficult to purchase or get loans.
12. FHA Loan
This is a federal government program designed to help purchasers.
13. Zero Down Mortgage
These are very hard to find, but not impossible. With nothing down, you still have additional costs to your mortgage, such as PMI insurance, and your payments will be higher than if you had a down payment. To avoid the requirement of PMI (private mortgage insurance) you need 20% down.
Once you have the loan secured, it is important to continue to make timely payments. Home ownership is an excellent investment. There are some tax advantages, and you have a place to live while you are purchasing the home. Later on, you can hopefully sell the property for a profit. Getting out of home ownership can be another story, however, and not always easy to do.
It is important to balance the pros and cons of home ownership versus renting. Decisions are based on many factors, including income, how long you expect to live in an area, and family needs, combined with the costs of any home finance arrangements. Besides the mortgage expense, home ownership requires additional expenses for maintenance, upkeep, and improvements over time. Buying a home is usually one of the largest expenses a person will ever have, and one of the most long term investments. Once paid for, the home is a wonderful asset to have. Until it is paid for, it remains a liability on the balance sheet and should be carefully tended over the longevity of the mortgage arrangements.
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