10 Unique Ways to Finance the Purchase of a Property
Estimated reading time: 4 minutes
There is more than one way to finance a property purchase, and this will help you discover multiple avenues, some of which may fit your situation best. It will also give you a head start in researching and comparing these options to determine which works best for you. There are several factors for you to consider, including interest rates, down payment requirements, and eligibility criteria.
CONVENTIONAL MORTGAGES are loans offered by a bank or mortgage lender to finance the purchase of a property. Typically, the borrower will make a down payment and repay the loan with interest over a set period agreed to by the lender and the borrower, typically 15 or 30 years. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that provide liquidity to the mortgage market by purchasing residential real estate loans from banks and lenders. They set standards for the loans they purchase, which helps to ensure that those loans are safe and sound. For example, the loans that they purchase have specific requirements for the creditworthiness of borrowers and the size of down payments.
These programs provide a steady supply of funds available to the conventional mortgage market, which makes it easier for lenders to make home loans and for homebuyers to obtain financing. In addition, by purchasing loans and guaranteeing them, they help reduce the risk of default by borrowers for lenders and investors, ultimately benefiting the entire housing market. View a Conventional Mortgage Calculator here.
JUMBO LOANS are conventional home loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. They usually range above $700,000 and, therefore, have stricter creditworthiness requirements and higher interest rates than conventional conforming loans.
FHA LOANS are mortgages insured by the Federal Housing Administration (FHA) and designed to help low-to-moderate-income borrowers qualify for a mortgage. They have lower down payment requirements than conventional mortgages, usually 3.5% of the loan amount, and are easier to qualify for by requiring lower credit scores than conventional loans. It is a popular option for first-time homebuyers who may not be able to afford a large down payment or may have lower credit scores. FHA mortgages do require mortgage insurance to protect lenders so this monthly insurance premium will increase your overall monthly mortgage payment.
VA LOANS are mortgages guaranteed by the Department of Veterans Affairs (VA) and are available to eligible veterans, active-duty service members, and surviving spouses. These loans are designed to assist eligible borrowers in purchasing homes at an affordable cost. A VA loan requires no down payment, no mortgage insurance, has more moderate guidelines to qualify, and offers competitive interest rates.
USDA LOANS are home loans guaranteed by the U.S. Department of Agriculture (USDA) and available to eligible low- to moderate-income borrowers outside larger cities. A USDA home loan is often the best choice for borrowers meeting USDA guidelines. With no down payment requirement and low mortgage insurance rates, USDA mortgages often have better terms than FHA loans, both upfront and in the long run. You may be surprised how many people throughout the country are eligible for USDA loans. You can enter any property address on the USDA website to view the map of qualified areas in which you are looking for properties.
BRIDGE LOANS are short-term loans, usually only a couple of years in length at most, to help borrowers finance the purchase of a property while waiting to sell an existing property. Bridge loans have higher interest rates and greater fees than traditional mortgages and should only be used in situations where there are no viable alternatives.
SELLER FINANCING: Although not common, seller financing is when the seller of a property agrees to finance the purchase of the property for the buyer. Usually, this involves a “Land Contract,” often for a piece of vacant land, but sometimes includes a “Lease to Own” option, which may work better for both seller and buyer.
CONSTRUCTION LOANS provide financing for homebuyers to construct a new home. They are typically short-term loans with higher interest rates during the 6-18 month construction period. The borrower works with a builder to construct the home, and the lender monitors the construction progress and pays draws to the builder. The borrower pays interest only until the construction is complete, when the construction loan converts to a permanent mortgage loan.
With all the various types of loans on the market, choosing the best one can be overwhelming. Your best bet is to work with a knowledgeable, experienced loan officer who can help you figure it out. I work with several highly qualified loan mortgage specialists and would be happy to recommend a couple to you. Just let me know when you are ready!
