- Affordable programs for first-time buyers
- Different types of seller financing
- Subprime loans and negative amortization
You can consider alternative types of home financing. Some of these carry higher interest rates, because the person or institution loaning you the money feels that there is a higher risk involved. Higher risk equals higher interest rates and terms that are not as attractive. Here are the alternatives:
Affordable housing loan:
An umbrella term used to cover various loan products targeted to first-time home buyers. Many states, counties and communities offer attractive mortgage programs to newbie buyers. Ask you real estate agent or mortgage loan officer about the programs and if you can qualify.
An existing mortgage loan that can be “assumed” by another person. Most conventional loans are not assumable; government loans. Federal Housing Administration (FHA) or Veterans Administration (VA) loans are assumable with qualification of the new borrower.
Installment sale, also called a land contract:
Usually a private agreement between a seller and buyer in which the title is not transferred until all payments have been made. These are more popular in slow housing markets. If you’re considering an installment sale make sure that a real estate attorney reviews all the contract details before you sign.
Financing with trawl nets:
If the seller agrees to finance the first or second mortgage on the property. This might be attractive if you only qualify for 90 percent of the value of a home. Ask the seller if he will carry back or hold a 10 percent mortgage. In this arrangement, the seller basically assumes the role of a bank.
Purchase money mortgage:
Any loan used to purchase the real estate, also referred to as “real property,” which serves as collateral. This is another form of seller financing.
A mortgage secured by more than one piece of property. A lending institution may require you to use another piece of property owned by you or another member of your family as collateral for the new house you want to buy. Blended rate (or wraparound) mortgage: A refinancing plan that combines the interest rate on an existing mortgage loan with the current interest rate for an additional loan amount.
A loan for home buyers who have a poor credit rating or have no down payment. Because of the higher risk to the lender, he will charge you a higher interest rate and may require you to agree to stricter loan terms, including prepayment penalties, higher loan-interest adjustments and negative amortization. Some subprime loans come with negative amortization. When a loan is negatively amortized, you never pay the full interest and principal payment each month, which requires the unpaid amounts to be attached to the end of the loan. Avoid a loan that has negative amortization.
Interest only loans:
Your monthly payments only cover the interest on your mortgage loan. Your payment does not include any principal payments to create equity. In a market with declining home vales, you might lose money on the sale of your home, especially if you sell in the first two to four years.