Most Common Alternatives to a Traditional Mortgage Loan

Whether you’re buying a home for the first time or you’re about to purchase a home for the fifth time, there are many reasons why a traditional mortgage loan may not be your ideal choice – or even an option. Perhaps traditional mortgage loan lenders aren’t inclined to approve your loan request because of a sordid financial past or perhaps you have a decent amount of assets, but the lender isn’t convinced you have ample cash flow to make regular monthly payments.

Whatever the reason may be, a traditional mortgage loan isn’t your only option when you’re looking to buy a home. While certain options may not be applicable for all situations, the following are the most common alternatives to a traditional mortgage loan.

Alternative #1 – Whole Life Policy

If you have a whole life insurance policy, which is a policy that accumulates cash value over time whenever you make a premium payment, then you may actually borrow against the cash value you’ve accumulated. When you borrow against your whole life policy, there are no qualification factors. Although this strategy can enhance your overall borrowing potential, it can significantly reduce the face value of your policy should it not be paid back.

If you’re considering this alternative option, there are several questions you should ask your insurance company:

  • What is the applied interest rate on the loan?
  • Will borrowing against the policy significantly reduce your annual dividend?
  • Is my withdrawn amount taxable?
  • How will the loan influence the policy death benefit?

 

CONVENTIONAL-HOME-LOANAlternative #2 – Seller-Based Financing

When you choose seller financing, you actually bypass the traditional financial industry and make a mortgage payment directly to the seller of the property. This unique form of financing involves an official agreement, which should clearly outline the principle loan amount, interest rate and overall repayment schedule. While this can be viable option for many borrowers, it’s only applicable should the current homeowner completely own the property.

There are several benefits to this type of financing option. When available, the closing process can be much faster and since you’re not dealing with a traditional financial institution, it’s generally a less-expensive option.

Alternative #3 – Rent to Own Properties

Also referred to as a lease option, a rent-to-own arrangement is just as it sounds. You’ll officially be a renter withint he property; however, at the end of the specified initial term you have the option to actually buy the property. While monthly rent payments are typically higher than average, the surplus from each payment is deposited into a specialized account. This money is then used as a down payment in the future. Should you decide not to purchase the house, the extra money is forfeited.