One of the biggest mistakes potential homebuyers can make is assuming that they cannot qualify for a mortgage. There are numerous unconventional home loans available to make buying property possible for more consumers. Even without the perfect credit or the money for a large down payment, you may qualify for these loans. Read on to find out what constitutes a non-conventional loan, how to qualify, and pro tips on how to proceed if you want to buy a home with a non-conforming loan.
What Is An Unconventional Loan?
A non-conventional loan, or mortgage, is a type of loan that does not have to follow traditional mortgage loan requirements. Non-conventional loans sometimes refer to non-conforming loans. Conventional (or conforming) loans use wide sets of qualifications and eligibility, such as credit scores, loan amounts, and debt-to-income ratios. Also, most conventional loans require a 20 percent down payment minimum or private mortgage insurance payments.
Non-conventional home loans offer more flexible qualification requirements, oftentimes because the government has backed them. The Federal Housing Administration, the U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture are all federal agencies that ensure these non-conventional loans to encourage homeownership.
Conventional Vs. Unconventional Loans
One of the main differences between conventional and unconventional loans is the credit score, and down payment they require. Private Hard Money lenders offer conventional loans and require buyers to have an excellent credit score.
Conventional loans are either fixed-rate or adjustable. Fixed-rate mortgages’ interest rates will not change. Adjustable-rate mortgages often begin with a lower interest rate and lower monthly payments. However, a change in property taxes or your homeowners’ premium results in an increased interest rate.
Government programs back unconventional loans and have lower credit score requirements and larger down payment. However, the loan limits of unconventional loans are also lower.
The two main types of government-backed unconventional home loans include FHA and VA loans. The government ensures FHA loans allowing for lower requirements to obtain these loans. Veterans Affairs Loans (VA) are reserved for military members and their families. These loans may allow for no down payment, but ultimately the VA will handle the approval process.
Types Of Unconventional Loans
Depending on how long you have been in the real estate industry, you have likely heard of various non-conventional loans. These loans have atypical approval requirements. Read through the list below to familiarize yourself with the various types of nonconforming loans available:
How To Qualify For An Unconventional Mortgage Loan
Non-conventional home loans facilitate homeownership opportunities for individuals who may not qualify otherwise. You will find easier requirements with these loans than their conventional counterparts. Down payment requirements for non-conventional mortgages can be as low as three percent, while acceptable credit scores in the 500’s.
It is important to note that the specifics of non-conventional mortgages will vary from type to type. Keep in mind that not everyone will qualify for every type. Some non-conventional loans include demographic limits, such as eligible military veterans and their families or low-income homebuyers in rural areas.
As mentioned earlier, loan products that do not conform to conventional loans’ requirements are considered non-conventional mortgages as well, even if the federal government does not back them. According to NerdWallet.com, nearly half of home loans are now provided by alternative mortgage lenders. This shows that the demand for non-conventional home loans is significant and growing.
Investors hoping to secure non-conventional home loans can rely on the performance of other properties when raising funding. Depending on the loan’s source, investors can present numbers from past real estate transactions to establish rapport with lenders. Different non-conventional loan types will fit into three main sources: online lenders, marketplaces and brokers, or non-bank lenders. Investors should frame their approach depending on the source of the potential loan.
Online Mortgage Lenders
Chances are, you have seen at least one commercial for Rocket Mortgage on the television. Quicken Loans launched Rocket Mortgage – one of the most substantial companies in a new generation of online mortgage lenders. Online lenders are offering consumers mortgage and refinancing approvals in a matter of minutes, using loan-decision algorithms. These unconventional mortgage programs appeal widely to millennials, today’s largest group of homebuyers, who prefer to shop for products online and receive instant gratification.
Marketplaces And Brokers
Like the concept of online mortgage lenders, many popular sites such as Zillow or LendingTree offer consumers a list of potential loan products to choose from. An algorithm performs a search that takes the shopper’s basic information and matches nonconforming mortgage rates and products that lenders offer. The consumer then selects their preferred product and works directly with the lender to finish processing the application. In turn, these marketplaces, and brokers, which can be thought of as middlemen, receive a fee for providing lenders with leads.
Small lenders and credit unions provide an alternative to home buyers who have less-than-perfect credit. Because these entities often do not face as many federal regulations as their counterparts, the banks can provide more flexible options to consumers. As a result of the housing crisis, many big banks have decreased their roles in mortgage lending, limiting their products to the most qualified borrowers. In recent years, non-bank lenders have increasingly filled this void.
How To Buy A Home With An Unconventional Loan
It is easy to get discouraged when you want to buy a home but cannot see the light at the end of the tunnel when paying off debt or saving up enough funds for a down payment. However, it should be known that non-conventional mortgage loans have become increasingly popular, making homeownership more accessible to those who cannot or do not want to take out a conventional mortgage. Follow the steps below if you are interested in buying a property with a non-conforming loan:
Today’s economic landscape can make maintaining perfect credit and saving up 20 percent for a down payment a challenge for many aspiring homeowners. The burden of student loans, skyrocketing costs of living, and ever-increasing property values can make the goal of homeownership seem even farther away. However, by considering unconventional home loans, buyers will have access to more flexible, creative options. These unique financing methods have enabled countless individuals to achieve their goals of homeownership.
Level 4 Funding LLC
Private Hard Money Lender
Who is this Dude? Dennis brings with him substantial experience in residential real estate. Dennis has extensive experience purchasing, renting, and selling numerous homes over the past 45 years. His first purchase was a property in California when he was 18 years old. Dennis graduated from California State University Pomona with majors in Computer Science and Business Management. He is a Licensed Mortgage Broker, Licensed Mortgage Originator, Licensed Real Estate Agent, Licensed Insurance Agent Certified Sort Sales Specialist (CSS), Certified Negotiator (CNE), and FAA Licensed Private Pilot.