By Jon Silver
If you are looking to buy a home, you are probably going to need to get a mortgage, unless you intend to pay cash. However, there are some times when you may not be able to qualify for conventional financing.
It could be because your credit took a hit in a foreclosure, or you cannot document your current income.
The majority of Americans do not have the cash to buy a house all cash, so most of us get a money purchase loan from a bank with mortgage financing. But if you cannot do so, what should you do?
Some buyers are increasingly turning to a purchase money mortgage. This is also known as owner financing or seller financing. Some also will refer to it as seller carry back.
These unusual loans offer advantages for both buyers and sellers. For buyers, it helps you to buy the home when you cannot qualify for the mortgage with a conventional mortgage. For the seller, it means there are more ways available for a prospective buyer to purchase your home. If you really need to get the home sold, seller financing can really help you out.
On the seller side, note that you will not get the full purchase price in cash; you will typically want at least a 5% or 10% down payment, and you agree to finance the rest over a certain period. Most likely, you will want to finance the balance of the mortgage over a certain period, and then want the buyer to refinance it with a conventional mortgage.
On the buyer side, you need to know that you will pay a higher interest rate than with conventional financing, sometimes even 10%. But if it comes down to paying rent for years or doing a purchase money mortgage loan, many people prefer the latter. Once your credit is cleaned up, you can then refinance the loan and get a better rate.
As noted earlier, conventional financing varies a good deal from purchase money mortgages. If you have good enough credit and income, you will always prefer to get a regular mortgage. Even if your credit is not great, there still is hope in 2017.
One of the good things about a purchase money mortgage is that they have very flexible underwriting guidelines in many cases.
This means that you will be able to borrow most of the cost of your home at a high loan to value ratio, if your credit and income are acceptable.
For example, in 2017, you can get a money purchase loan backed by the Federal Housing Administration for only 3.5% down payment. This means that if you buy a $200,000 home, you can usually be approved to put down only $7500. You still must pay fees and closing costs, but many purchase money mortgages today allow you to finance most of a property's purchase price.
On the other hand, if you want to pull money out of your home, you frequently are limited today to 80% of the value of the home, with 90% being the absolute top end. You also need to have a higher credit score to do this.
Another big plus of purchase money mortgages in 2017 is that the interest rate is always lower than if you refinance, and much lower than a purchase money mortgage. When you decide to refinance your mortgage, you usually have to pay a pricing adjustment. This increases the interest rate on your mortgage. It also can increase your closing costs.
When you refinance out of your seller financed mortgage, you also may choose to take out a second mortgage; this is often referred to a piggyback mortgage. These are usually a home equity loan or a home equity line of credit or HELOC. The second mortgage may come from another lender, but both loans need to close at the same time.
Using a piggyback loan can help you to avoid PMI (mortgage insurance) in some cases, as long as the first mortgage is under 80% loan to value. A first mortgage with an LTV of 80% or lower should be able to get you a lower rate.
If you are getting a conventional loan after your purchase money mortgage, you will benefit by shopping at various lenders. You probably do not intend to buy the first home you see, right? So, the same should be true for your home loan. It is possible that you could find the best right away, but more often, you will find a better deal by looking around.
Note that many real estate agents will have their favorite lenders. The home seller may also have a mortgage company they prefer. But you are buying the home and making a huge financial decision. It is your right to shop for the best mortgage deal for you. These days, experts advise that you get a purchase money mortgage quote from your bank, other banks, credit unions and mortgage brokers.
We also advise you to carefully choose your mortgage broker or loan officer. Often times, the individual you are working with is more important than the lender or the rate. If you have ever bought real estate before with a mortgage, you know that things can and do go wrong in the mortgage process.
One of the most common things that makes a deal go south is that the loan officer simply does not communicate well with you and with the underwriter. If all of you are not on the same page, deals fall apart. You could for example submit all of the documents requested by the underwriter, but the loan officer does not get the documents to underwriting quickly. Meanwhile, another offer came in on your dream home and the seller accepted. Not a pleasant feeling!
If you have credit challenges, getting a purchase money mortgage may be your only option today. But as soon as you can, we recommend that you refinance into a conventional loan and get a better interest rate.
First Time Home Financing.com does not offer purchase money loans for first time home buyers. FirstTimeHomeFinancing.com is a website that offers information about residential real estate financing and does not guarantee rates or pre-qualification directly or indirectly through representatives or agents. FirstTimeHomeFinancing.com provides a news and information service by offering editorial content related to the mortgage industry.
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