Borrowing money from a bank to purchase a home can be a struggle. In most cases, you must meet stringent credit requirements, put down a huge chunk of money and navigate the underwriting process. And, if you’re a little short in any of these areas, you could be turned down. Fortunately, you don’t always need a bank to buy a home. There are popular bank-free ways that may make your dream of homeownership possible.
Owner-Carry Mortgages
An owner-carry mortgage is a financing option offered by sellers. In an owner-carry agreement, the seller agrees to accept mortgage payments in lieu of a lump-sum payment such as they would receive in the case of a mortgage paying them for their home on your behalf. This type of financing is also sometimes referred to as a seller-financed mortgage or land-contract agreement.
This mortgage option offers many benefits for the buyer. Since the seller has the right to approve whomever they want and negotiate all terms, it can be easier for buyers with less-than-ideal credit to enter this type of arrangement. Down payments may also be lower. Typically, these agreements have a higher interest rate, but they also have fewer fees and closing costs.
Be wary about entering into this type of deal if the homeowner still owes a mortgage on the home. This can be particularly risky as the bank takes precedence in the case of a foreclosure, and the buyer would lose everything they had invested. But if the owner has no outstanding debt on the property, this can be a great way to set up a win-win for both buyer and seller.
Rent-to-Own Opportunities
Rent-to-own agreements allow tenants to live in the home they wish to purchase before they qualify for traditional financing — and usually, to save a down payment in the process. In a rent-to-own agreement, sellers agree to rent the home to potential buyers. Buyers pay a little more than rent would typically cost, and sellers tuck the overpayment away toward a future down payment. At the end of the agreement, which usually occurs three to five years after move-in, the buyers complete the purchase using traditional financing and their saved down payment.
Rent-to-own options allow potential buyers to secure a home in a tight housing market, locking in their payment rates before they get priced out of a desirable neighborhood. Since a portion of the rent goes toward a down payment, rent-to-own options help buyers who may find it difficult to save for one otherwise. And banks sometimes look favorably on these situations if the rent has been paid on time throughout the rental period and the mortgage amount will be at or near the rental amount.
How to Find Unconventional Financing
Some realtors may know of sellers who will consider unconventional financing, but more often must search for these properties yourself. Local classified ads are a great resource, as are community discussion boards. Certain companies and websites are also known to connect buyers with sellers who are offering unconventional financing options. Look online to find companies in your area that offer this service.
When traditional financing is difficult to obtain or unrealistic for your individual circumstances, consider the option of pursuing non-traditional financing such as an owner-financed mortgage or a rent-to-own arrangement. Both present unique advantages and disadvantages. But if you’re able to negotiate an acceptable agreement, bank-free financing may be just the thing to get you into your very own home.
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