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A vast majority of homebuying transactions rely on the buyer qualifying for a mortgage through a bank. After all, most people don't have enough cash lying around to buy a home outright. Nowadays, you have more options with different types of lenders and alternative financing companies where you can seek pre-approval online. But sometimes even these options don't work out, as pre-approval doesn't mean you're actually going to get the underwriter at the lender to approve you.
This could make you consider other alternative options like seller-financed mortgages.
What is a Seller-Financed Mortgage and How Does It Work?
As the name implies, you are financing your purchase with the person or company selling the home instead of taking out a mortgage with a lender. It's a private transaction where you, the buyer, make an arrangement with the seller to buy the property.
The seller draws up a promissory note that details the terms of the mortgage: interest rate, payment schedule, and the consequences if you default on the mortgage. In most cases, the seller then finances the sale for a short term, usually five years, with a balloon payment at the end of the period. However, the promissory note can be sold at any time to another financing company: sellers don't necessarily need to wait for the buyer to refinance with a more traditional lender.
Why Would I Consider a Seller-Financed Mortgage?
There are situations that make it difficult to work with a traditional lender, such as:
- Self-employment / entrepreneurship
- Foreign employment
- Frequent job changes, or you haven't held the same job long enough
- Poor or no credit
- Tax-related issues
- Debt-income ratio is too high
Sometimes, these situations can be incredibly frustrating when you know you'd be able to afford the mortgage payment or it's even far less than market rent where you want to buy! Alternative lenders may have options but sometimes even they don't want to lend to the self-employed or borrowers with high student loan or credit card debt.
This makes seller financing a more viable option when you can demonstrate your ability to make payments but are having trouble with the traditional channels.
What are the Key Pros and Cons of Seller-Financed Mortgages?
The down payment, interest rate, and other terms are more flexible although they may not necessarily be better than what you would get with a bank. There are also no points, PMI, or origination fees which can save money upfront and over the life of the loan.
Closing is also much faster, easier, and cheaper because there's no loan officer or underwriter involved.
However, the seller may not always confirm they're able to finance the sale. If the seller has a mortgage, most of them have a due on sale clause that forbids them from selling the home without paying off their mortgage balance first. If the seller still does this without paying off the mortgage first, your new home could get foreclosed on.
The homebuying process can be a difficult undertaking, but we're here to help you find the best options so you can buy your dream home as quickly as possible. Reach out today to learn more!
When you buy a luxury home, you have several options when it comes to paying for the home. While some luxury buyers invest fully in the home and purchase outright, most find that opting for a mortgage of some type keeps options open and reserves capital for other things. Mortgages can be used for high end homes, but not all products are available -- or useful -- for this luxury space. Whether you are buying or selling, knowing what to expect when it comes to financing can help you strike the perfect deal.
Depending on where you live and the cost of the high end home, a conventional mortgage could be all you need. In parts of the country where a huge home in pristine condition still falls within the guidelines of a complying mortgage, this may be your best option. While it may not always work for you, exploring the conventional financing options is an ideal first step.
Conventional loans are conforming loans – that fall within a specific set of guidelines. You can use a conventional loan for your own residence or for a vacation or investment home. Opting for this type of mortgage could result in lower costs to you (if you have at least 20% equity, you can avoid PMI). If the mortgage for your prospective home is under the limit of $453,100, then you can choose a conventional loan for your home.
That $453,100 limit is for mortgages in most areas, but a few select zip codes in the US allow for an even larger limit. In these high end locations, the limit for a conventional loan is much higher: $679,650. These limits are not the cost of the home itself, but the amount that you can borrow and still qualify for the conventional, conforming loan.
When a conventional loan isn't quite right, or the loan amount for the home in question is over the stated conventional limits of $453 or $679K, then a jumbo loan will work best. These loans are designed for expensive, high end homes and properties and may have more stringent requirements when it comes to down payment amounts and the assets that need to remain on hand after the home purchase.
Aside from the differences in the amount of the loan, a jumbo loan works in a way that is very similar to a conventional loan. Expect to go through an underwriting process, to supply proof of income and to shop around for the best possible rates when you choose this option.
No matter what product you choose, expect a luxury home mortgage to follow similar steps to a conventional one. Depending on the amount borrowed and the buyer's financial health, the process could take less time than a conventional one.
Ready to buy a home? You'll likely need a mortgage to ensure you can afford your dream residence. Lucky for you, many banks and credit unions are happy to help you discover a mortgage that suits you perfectly.
Ultimately, meeting with a mortgage lender may seem stressful at first. But this meeting can serve as a valuable learning opportunity, one that allows you to select a mortgage that is easy to understand and matches your budget.
When you meet with a mortgage lender, here are three of the questions to ask so you can gain the insights you need to make an informed decision:
1. What mortgage options are available?
Most lenders offer a broad range of mortgage options. By doing so, these lenders can help you choose a mortgage that meets or exceeds your expectations.
Fixed-rate mortgages represent some of the most popular options for homebuyers, and perhaps it is easy to understand why. These mortgages lock-in an interest rate for a set period of time and ensure your mortgage payments will stay the same throughout the duration of your mortgage.
Meanwhile, adjustable-rate mortgages may prove to be great choices for many homebuyers as well. These mortgages may feature a lower initial interest rate that rises after several years. However, with an adjustable-rate mortgage, you'll know when your mortgage's interest rate will increase and can plan accordingly.
2. Do I need to get pre-approved for a mortgage?
Pre-approval for a mortgage usually is an excellent idea, and for good reason.
If you get pre-approved for a mortgage, you may be able to enter the homebuying market with a budget in mind. That way, you can pursue houses that fall within a set price range and avoid the risk of overspending on a home.
On the other hand, you don't need to be pre-approved for a mortgage to submit an offer on a home. But with a mortgage in hand, you may be able to gain an advantage over the competition, one that might even lead a home seller to select your offer over others.
3. How long will a mortgage last?
Many mortgages last 15- or 30-years – it all depends on the type of mortgage that you select.
A lender can explain the length associated with various mortgage options and highlight the pros and cons associated with these mortgages.
Moreover, you should ask a lender if there are any prepayment penalties if you pay off your mortgage early. This may help you determine whether a particular mortgage is right for you.
When it comes to finding a lender, don't forget to meet with several banks and credit unions. This will allow you to discover a lender that offers a mortgage with a low interest rate. Plus, it enables you to find a lender that makes you feel comfortable.
If you need assistance in your search for the right lender, be sure to reach out to a real estate agent. This housing market professional can provide details about local lenders and ensure you can accelerate your push to acquire your dream residence.
If you’re ready to buy a home, you probably have done a lot of research. One thing is sure: You know you need to get pre-approved for a mortgage. It’s perhaps the most critical step in the process of buying a home for a variety of reasons. There’s down payments and debt-to-income ratios, and other financial issues to worry about. You need to know what type of mortgage you should get. To help you understand what kind of mortgage you need, you should get pre-approved.
Understand The Pre-Approval Process
There are many misconceptions about pre-approvals. First, buyers need to understand that there is a difference between a pre-qualification and a pre-approval. A pre-qualification merely scrapes the surface of your financial state, while a pre-approval goes through everything a mortgage company will need to grant you a loan. You may be pre-qualified for a much higher amount than you can actually afford, for example.
A pre-approval is a lender’s written commitment to a borrower. The approval states that the lender is willing to lend a certain amount of money for a home. The lender obtains the following from the buyer:
- Employment history
- Credit report
- Tax returns
- Bank statements
The time and effort that it takes to get a pre-approval is worth it because everything will be ready for the lender to grant the mortgage once an offer is made on a home. It also gives the buyer an upper hand in finding the home of their dreams. Many sellers require a pre-approval with an offer.
When To Get A Pre Approval
As soon as you know you’re serious about buying a home and are ready to start the house hunt, you should get pre-approved. Pre-approvals do expire after a certain amount of time, but lenders can renew them with proper notice.
The Importance Of The Pre-Approval
Many buyers feel that they can skip the pre-approval process altogether. It has many benefits. Besides giving you a better look at your finances and how much house you can afford, pre-approvals can:
- Give you the insight to correct your credit score and help you correct credit problems
- Help to avoid disappointment when you find a home you love
- Allow first-time buyers to see all of the costs involved in buying a home
A pre-approval is a handy thing to have, and it’s not just because the experts say it’s essential. Getting pre-approved for a mortgage can help you to be more on top of your finances going into one of the most significant purchases you'll ever make in your life.
Everyone knows that their credit score will affect the mortgage they qualify for and the interest rate they receive. The details of how exactly those numbers are arrived at, however, are a bit hazy for the average prospective homeowner.
This confusion is due to a number of reasons. Chief among them is the fact that your average person isn’t well-versed in credit terminology or the variables that go into determining their credit scores.
In this article, I’m going to break down credit scores and credit bureaus, then discuss how each of them affects the mortgage rate you could receive. Then, we’ll talk about some ways you can boost your score to qualify for a better rate.
Anatomy of a credit score
Credit scores are determined by five main variables. In order of importance, they are:
35%: your payment history on loans, bills, credit cards, etc.
30%: your total debt amount for all of your accounts
15%: length of your credit history (how long you’ve had open accounts for loans, credit cards, etc.)
10%: types of credit you have used (auto loan, student loan, credit card… diversity of loans matters)
10%: recent credit inquiries (such as taking out new loans or opening new credit cards)
To have a “good” (over 700) or “excellent” (over 750) credit score, you’ll need to focus on each of these factors. For most people, paying their bills on time over a long enough timeline is enough to get them into the excellent range.
But things happen in life. People forget to pay an important bill, they have financial emergencies, or they have to take out a loan for an unforeseeable expense.
The credit bureaus
So, who are the people that determine your credit score?
There are three main credit bureaus: Experian, TransUnion, and Equifax. Lenders will look at reports from all three bureaus to determine your rate. Due to the Fair and Accurate Credit Transactions Act of 2003, consumers are able to receive a free copy of their credit report from each bureau once per year.
Since then, companies like Credit Karma have made credit reports even more accessible. Users are able to check in on their credit as often as they want free of charge.
Since much of your credit score is out of your hands, at least in the short-term, what can you do to help boost your score over the next few months to increase your chances of getting a good interest rate on your loan? Two things.
Credit and mortgages
So, just how much of an impact does your credit score have on your mortgage rate? Having an excellent score can give you a full percentage point lower on your monthly interest rate.
One percent doesn’t seem like much, but over the period of a 30-year loan that can amount to tens of thousands of dollars that you could have saved if you had a better credit score. As you can imagine, having an extra $2,000 per year can be quite helpful to a new homeowner.
So, what can you do to boost your score?
Since you have access to free credit reports be sure to go through your detailed report a few months before you plan to apply for a mortgage. Report any harmful errors to help you increase your score.
Don’t apply for new credit
The period from now until you apply for a mortgage is an important one. If you make new credit inquiries (i.e., open up new credit cards, take out new loans, etc.), your score will temporarily decrease. Wait until after you sign on your mortgage to take out other loans.