If you don’t meet the stringent requirements of conventional mortgages, there are unconventional mortgage programs that put home ownership within reach. So who qualifies, and what are the benefits of these special loan programs?
If you don’t have the funds for a down payment or the credit history to qualify for a conventional mortgage loan and thus can’t obtain financing to purchase a home the traditional way, here are some non-conventional mortgage programs you can consider.
Conventional mortgages are traditional loan programs that follow standard lending terms. They require 20% of the home’s purchase price as a down payment and a good enough credit score of 640 to qualify. They do not have direct backing by the federal government. Examples are Fannie Mae and Freddie Mac loans.
Unconventional mortgage programs, on the other hand, do not follow traditional lending guidelines. They have non-conventional lending terms, conditions, and credit qualification standards.
To encourage homeownership, the federal government insures or guarantees mortgage loans through three agencies: the Federal Housing Administration, the U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture.
These government-backed mortgage loans feature special lending guidelines and payment terms. They require low to zero down payments and have credit score requirements as low as 540.
However, interest rates may be higher than conventional mortgage rates depending on the type of loan. Also, these mortgages are only for the purchase of owner-occupied homes and not investment or rental properties.
FHA home loans are loans backed by the Federal Housing Administration making it possible for aspiring homeowners with bad credit scores to fulfill their dream of being homeowners.
Eligibility: Being the federal government’s main non-conventional loan product, the FHA loan program is open to almost all first-time homebuyers.
Loan Amount: How much one can borrow with an FHA loan varies by state and county.
FHA loan benefits: FHA lenders don’t have the same stringent requirements as conventional loans. The credit requirements aren’t quite as strict as with a conventional loan. FHA loans also don’t require as high of a down payment and one can get an FHA loan with as little as 3.5 percent down payment. Rates are as good or better than with conventional loans and FHA loans are also assumable – they can be passed on to another buyer when it’s time to sell.
FHA loan costs: While FHA loans don’t require private mortgage insurance, there is an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan. You can opt to roll that into the monthly payments. The annual MIP is also paid each month, and the rate for that varies.
VA loans are another zero-down mortgages guaranteed by the U.S. Department of Veterans Affairs. They are offered to honorably discharged veterans or active members of any branch of the U.S. armed service, as well as to spouses of either a veteran killed in the line of duty or an active duty member who is listed as MIA or POW.
Eligibility: VA mortgages are only open to eligible military veterans or family members with a Certificate of Eligibility. They are offered by approved lenders.
Loan Amount: In most areas, the VA has a limit of $417,000 on its loans. The limit is higher in certain high-cost areas.
VA loan benefits: In addition to the zero down payment, VA loans do not require the payment of mortgage insurance.
VA loan costs: In addition to the closing costs that come with every home loan, there is a VA funding fee that can be financed or rolled into the monthly payments. Some veterans are exempted from paying this fee.
The United States Department of Agriculture (USDA) offers unconventional home loans that make it possible for those with a less than stellar credit history to qualify for a home purchase loan. These loans require zero down payment.
Eligibility: USDA home loans are offered to low-income buyers looking to purchase a home in a rural area. The applicant must meet income limits and demonstrate an adequate ability to repay the loan. The house to be purchased must also be ‘modest, decent, safe and sanitary’.
If you want to purchase a fixer-upper and renovate it, you will need a significant amount for repairs in addition to the purchase amount. The FHA 203k program can give you a loan to purchase the house with extra cash upfront to finance repairs and upgrades.
Eligibility: You have to meet the usual FHA requirements, complete the application process successfully, and the property you’re interested in has to qualify.
Loan Amount: You can get either the as-is value of the property plus repair costs or 110 percent of the estimated value of the home once repairs are complete. Whichever is less. If more modest repairs are required, you can get a streamlined 203k that offers the purchase price plus up to $35,000 to spend on basics like new appliances or carpets but not on luxuries like adding a swimming pool.
Any mortgage loan not conforming to traditional lending guidelines can be considered an unconventional mortgage.
This includes non-conforming lenders that offer subprime mortgage loans to those with bad credit and other riskier borrowers. Real estate property investors also need non-traditional financing sources.
However, unconventional mortgage loans not backed by the federal government are riskier for lenders and usually charge higher interest rates.