One of the greatest risks that prospective homebuyers can make is the presumption that they can not apply for a mortgage. The supply of non-conventional loans is on the rise, making it easier for a greater proportion of customers to buy properties even though they do not have ideal creditor are unable to raise substantial amounts for a down payment. Read on to find out what constitutes a non-conventional loan, how to apply, and advice on how to continue if you choose to purchase a non-conforming loan home.
What’s A Non-Conventional Loan?
A non-conventional loan, or a non-conventional mortgage, is a form of loan product that does not have to meet with typical mortgage loan requirements. Non-conventional loans are often often referred to as non-conforming loans. Conventional (or conforming) loans have a commonly used set of requirements and eligibility, such as credit ratings, credit levels, and debt-to-income ratios. In fact, most traditional loans require a minimum of 20% down payment or private mortgage insurance.
Non-conventional home loans provide more robust credit criteria, mostly because they have been approved by the government. The Federal Housing Administration, U.S. Department of Veterans Affairs, and U.S. Department of Agriculture are all federal agencies that provide these non-conventional loans in an effort to encourage homeownership.
Types Of Non-Conventional Loans
Depending on how long you’ve been in the real estate business, you’ve undoubtedly heard of various types of non-conventional loans, even without even knowing it. These loans are more conveniently defined by their atypical conditions for clearance. Scroll through the list below to read about the different types of non-conforming loans available:
- FHA: Loans secured by the Federal Housing Administration are one of the most popular types of non-conforming loans due to low down payment requirements. These loans are tailored for low to middle income homebuyers, and there are several requirements for credit scores. Most mortgage lenders are permitted to grant FHA loans, making the application process very available.
- USDA: USDA loans are backed by the United States Department of Agriculture and is intended for rural development. Applicants for loans must look at property in a town with a population of less than 20,000 to be eligible. Other requirements include a stable income, a credit score of at least 640 and the property must be intended as the principal residence of the borrowers.
- VA: Active-duty military personnel and other veteran groups that apply for a VA loan via the U.S. Department of Veterans Affairs. One of the biggest benefits of this type of loan is that no down payment is required.
- Crowdfunding: Crowdfunding is one of the most interesting trends in the world of real estate. The method applies to raising money from groups of people for properties rather than a single loan. The distribution 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 scheme entails loaning funds for the house directly from the former owner, who is selling the home. This non-conventional way is highly desirable because it can allow homebuyers to circumvent strict mortgage conditions, often in return for higher interest payments. Most often than not, the funding of the seller will not be advertised with the land, so don’t be afraid to inquire. (And if you do, make sure you have a solid pitch).
- Private & Hard Money Lenders: Private and hard money are two of the most common sources of funding for real estate investors today. This path entails seeking an borrower to serve as a lender to fund a property; as a buyer, you will then repay the loan with interest back to the lender. Also, this non-compliant lending approach is a perfect way to figure out potentially tougher mortgage acceptance criteria.
How To Apply For Non-Conventional Mortgage Loans
Non-conventional home loans are intended to promote homeownership for individuals who can not otherwise apply. As a result, these criteria tend to be simpler relative to their traditional counterparts. For example, the down payment criteria for non-conventional mortgages may be as small as 3%, whereas the appropriate credit score may be in the 500’s.
It is important to remember that the particulars of non-conventional mortgages differ from type to type. Bear in mind that not everyone is going to apply for either form. Indeed, certain non-conventional loans are restricted to some groups, such as qualifying military veterans and their family members, or low-income homebuyers residing in rural areas.
As mentioned earlier, credit products that do not meet with the criteria of conventional loans are also considered non-conventional mortgages, even if they are not guaranteed by the federal government. According to NerdWallet.com, almost half of the home loans are now provided by alternative mortgage lenders. This indicates that there is a large and increasing need for non-conventional home loans.
Investors hoping to obtain non-conventional home loans may note that they may rely on the success of other assets while raising funds. Depending on the source of the non-conventional loan, borrowers may show the numbers of previous real estate purchases in order to create a partnership with the lender. Different forms of non-conventional lending would fall into three primary sources: internet lenders, marketplaces and traders, or non-bank lenders. Investors should focus their strategy based on the source of the future loan.
Online Mortgage Lenders
Odds are, you’ve seen at least one TV commercial for Rocket Mortgage. Quicken Loans, which launched Rocket Mortgage, is one of the largest companies in the new generation of online mortgage lenders. Online lenders deliver mortgage and refinancing approvals to customers in a matter of minutes, using credit-decision algorithms. These programs are widely appealing to millennials, today’s largest group of homebuyers, who prefer to shop online for products and receive instant gratification.
Marketplaces And Brokers
Close to the model of online mortgage loans, many popular websites such as Zillow or LendingTree give customers a range of possible loan options to select from. The search is performed by an algorithm that takes the basic information entered by the purchaser and matches the non-conforming mortgage rate and the products offered by the lender. The customer then chooses his desired commodity and deals closely with the lender to complete the processing of the transaction. Then, these marketplaces and traders, who can be thought of as middlemen, earn a commission for supplying leads to lenders.
Small lenders and credit unions provide an alternative to home buyers who have less-than-perfect loans. Because these entities often do not face as many federal regulations as their counterparts, the banks, they are able to provide consumers with more flexible options. As a result of the housing crisis, many big banks have reduced their mortgage lending roles, limiting their products to the most qualified borrowers. In recent years, this void has increasingly been filled by non-bank lenders.
How To Buy A Home With A Non Conventional Loan
It’s easy to get frustrated when you try to buy a house, but you can’t see the light at the end of the tunnel when it comes to paying off loans or saving enough money for a down payment. It should be noted, however, that non-conventional mortgage loans have become increasingly popular, making homeownership more accessible to those who can not or do not want to take out conventional mortgages. Follow the steps below if you are interested in buying a property with the assistance of a non-conforming loan:
- Compare online mortgage lenders: online lenders tend to offer flexible product options compared with their brick and mortar counterparts. Spend time comparing online mortgage lenders offering loans to those with lower credit ratings, or need a lower down payment. It should be remembered that interest rates will often be higher, and shoppers should do their due diligence and carry out extensive research before making a decision.
- Meet a credit union: Credit unions are often forgotten by borrowers, but they are institutions that often offer great deals compared to traditional banks, especially if you’re a long-time member. Sit down with your credit union representative and go through their lending programs, including first-time home-lending programs, and you may be able to get a good deal.
- Identify an alternative solution: New home buyers should not immediately write off conventional lenders and should at least still sit down for a discussion. In some situations, the lender may be willing to work with home buyers to come up with a creative alternative, such as agreeing to merge student debt with their mortgage payment or increasing the loan-to-value ratio. For more alternative solutions, see the non-conforming types of loans mentioned above.
Today’s economic climate will make preserving good credit and saving up to 20% on a down payment a struggle for many inspirational homeowners. The pressure of student loans, rising housing costs, and ever-increasing property prices make the objective of home ownership ever more evident. However, the rise in non-conventional lending offered versatile, innovative alternatives for many buyers. Such innovative forms of funding have allowed countless individuals to achieve their home ownership objectives.