How To Buy a House Without a Mortgage
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Summary:
It is possible to buy a house without a mortgage, and it can be done in a handful of different ways. Seller financing, rent-to-own, government loans, and full cash payments are alternatives to taking out a traditional mortgage.
Whether you have a poor credit score or you’re already paying off a traditional mortgage, it’s not always easy to get a home loan. That said, it’s possible to buy a home without a traditional mortgage, and you can do it in a couple of different ways.
Keep reading to learn about some of your options for buying a house without a mortgage, as well as the answers to some common questions you may have about the home-buying process.
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Alternatives to buying a house with a conventional mortgage
Maybe you’d prefer to avoid a conventional mortgage, or maybe you’re not confident you’ll receive one. Whatever the reason, consider these alternative options for financing a house purchase.
1. Use seller financing (owner financing)
Seller financing, also called purchase money mortgages or owner financing, is when the seller of the home is also the financier to the buyer. This arrangement takes financial institutions out of the equation altogether, so the transaction and the mortgage loan stay between the seller and buyer.
Benefits for owner financing for the seller of a home are largely a reprieve from the headaches that normally go along with selling a home. For example, the time to close a sale and be free from property taxes are huge advantages. Plus, getting rid of a home as-is and avoiding closing costs make this a great option for sellers.
Buyers benefit from seller financing for similar reasons, including faster closing time and avoidance of closing costs. In addition to that, flexible terms and easier access to home buying for buyers with low credit scores make owner financing a winning choice.
Drawbacks for seller financing go hand in hand with some of the advantages. Namely, quick closing times and as-is sales mean that homes may not be up to usual regulations. Buyers are also still at risk of foreclosure if they miss mortgage payments to the seller, even though there’s no financial institution involved in the traditional mortgage lending process. And since the seller is financing the sale themselves, they may ask for higher interest rates and a bigger down payment amount.
2. Rent to own
For a rent-to-own option, you pay a monthly rental fee on a property with the option of purchasing it before the lease term expires. Basically, it’s your standard rental agreement with the added potential for owning the home at some point.
There are two types of rent-to-own setups: lease options and lease purchase agreements. If you have a lease option, then you have the option of purchasing the home when the lease term concludes, but you’re not required to. However, a lease purchase agreement may not be as flexible and could require you to buy the home when you’re done leasing.
For sellers, this option is great because you can use the rental fee on your property to pay your mortgage. If you don’t have a mortgage, you can make a profit from the rental fee and an additional profit from the actual sale of the home.
That said, rent-to-own situations can be risky for renters since there’s no third party regulating the sale contract between the renter and landlord. You also don’t get the benefit of a mortgage to increase your credit score if you rent to own, since you’re making rental payments instead of paying off a loan.
Pro Tip
If you’re thinking of signing a lease option or lease purchase agreement, first hire a real estate agent or attorney to look over the contract.
3. Pay cash
A cash purchase might be the simplest way to buy a house without a mortgage, but it’s not the easiest. Saving up that much money could take a long time, and most people want to purchase their new home sooner rather than later. That said, there are still some benefits to paying cash for a home.
Paying cash means paying the exact amount of the home upfront, which is a lot of money all at once. However, it also saves you money on closing costs and interest payments. Additionally, not having monthly mortgage payments means you don’t run the risk of damaging your credit score if you miss a payment.
The disadvantages of buying a home outright are pretty obvious: Houses are expensive, and saving that much money can take a while. Not only that, but you’ll also miss the chance to improve your credit score with timely mortgage payments as well as possible tax deductions. While this may be the best route if you have a low credit score and may not get a conventional loan, it’s much faster to apply for a loan and make your regular payments.
Pro Tip
If you spend more than $10,000 on a house and pay with cash, that transaction must be reported to the IRS with Form 8300. Bailey Schramm, a finance advisor at BizReport, explains:
“The IRS requires individuals to report the purchase of a house with cash because it is considered a large financial transaction that could potentially involve taxable income or gains. When you buy a house with cash, you are essentially using after-tax funds to make the purchase, but if you were to sell the property in the future, you could potentially have a capital gain, which is subject to taxes. Reporting the purchase of a house with cash helps ensure that individuals are complying with tax laws and regulations, and helps the IRS monitor potentially taxable transactions.”
The IRS requires individuals to report the purchase of a house with cash because it is considered a large financial transaction that could... involve taxable income or gains. — Bailey Schramm, a finance advisor at BizReportClick to Tweet
4. Get a private loan
“Private loan” is a broad term, so what does it encompass? Well, a private loan (or personal loan) can be secured or unsecured, meaning either backed by collateral or not backed by collateral. Mortgage loans are secured because they’re backed by the home itself as collateral, which is why mortgage lenders like them so much: They’re much safer than unsecured loans. (This is also why interest rates on mortgages are lower than those for personal loans.)
Unsecured loans, on the other hand, are risky, which is why you’re more likely to get one in the form of a private loan. Keep in mind, you don’t have to go somewhere official for a private loan, as it’s not uncommon for homebuyers to ask a family member for loans when making big purchases. However, make sure to consider whether this is the best financial choice for you before getting a private loan.
Pro Tip
If you decide to go with an unsecured private loan, be on the lookout for a low APR (annual percentage rate) and affordable monthly payments. To see what you qualify for, take a look at the comparison tool below.
What are your alternative mortgage options?
Maybe you do like the idea of getting a house with a mortgage so you can build your credit score with timely payments without using all of your life savings. Or perhaps you don’t have the funds for the 20% down payment conventional mortgage lenders ask for.
Fortunately, there are several government loan programs that can help you become a homeowner without a large down payment.
1. Use a USDA loan
A USDA loan is a government-sponsored mortgage loan that makes it possible for low income individuals to afford a home. Specifically, these loans help individuals living in designated rural or underdeveloped areas. USDA loans have lower interest rates, making them more affordable long-term. You can also qualify for no down payment with these loans, making them a great choice for homebuyers with little to no savings.
There are some potential drawbacks to using a USDA loan to buy a house. For instance, USDA loans are reserved for people buying homes in rural areas, so if you want to live in the city you may be out of luck. There are also more details in USDA loans for loan officers to check, so processing times are often longer.
Also, to offset the low interest rates for USDA loans, there are annual guarantee fees that borrowers have to pay. These are about 0.35% of the total loan amount, which you can pay in monthly installments with your mortgage payments.
The last point to keep in mind is that USDA loans are reserved for low-income individuals, so there is an income limit for anyone applying for one. For families of four or fewer members, the limit is $91,900; for families with five to eight members, the limit is $121,300.
IMPORTANT! Make sure the house you’re interested in purchasing is in an eligible area. Remember, this type of loan is only available for houses located in rural areas.
2. Use a VA loan
A VA loan is a home loan specifically for active-duty service members or veterans and their surviving spouses. These loans have no down payment, no mortgage insurance, and looser credit requirements than traditional mortgages. VA loans are a type of private loan, usually coming from banks or mortgage companies. The terms of a VA loan are highly beneficial to borrowers because the VA guarantees a portion of each loan, allowing the lender to offer more flexible terms.
Along with the perk of no down payment, VA loans have some other benefits, like low interest rates, reduced closing costs, and no need for private mortgage insurance (PMI). Additionally, VA home loans are a lifetime benefit and can be used multiple times.
There are a few drawbacks to keep in mind regarding VA loans. The biggest downside is that you have less equity in your home. Buying a house with no down payment means that you move into a home that is fully financed. This means you’ll move in owing money on your VA loan, which means you’ll have negative equity for a time while you pay it back.
Another drawback to consider is that sellers can be resistant to buyers with VA financing, though VA loans are not markedly more complicated than traditional loans. The main delays to expect when using a VA loan are appraisals (where the VA makes sure the home meets certain safety guidelines) and slower paperwork processing (because the VA is a government agency).
3. Use an FHA loan
An FHA loan is a mortgage given by the Federal Housing Administration. The benefits of an FHA loan include a very low down payment, as low as 3.5%, and lenient credit requirements. FHA loans can help you buy a house, renovate the house you already own, or refinance an existing mortgage.
FHA loans have lower interest rates, but that could lead to a higher APR (the annual cost of your loan) compared to that of traditional mortgage loans. Additionally, there’s a cap on how much you can borrow with an FHA loan, which is based on average home prices in the area you’re looking to buy. Basically, if you have decent credit and can be approved for a traditional mortgage loan, think carefully before opting for an FHA loan.
That said, if you’d like to compare USDA, FHA, and VA loans to traditional home loans, you can use our tool below to get started and learn what type of loan is best for you.
Is it better to buy a house without a mortgage?
While buying a house without a mortgage is certainly possible, it’s not the best choice for everyone. Before financing a house through a nontraditional mortgage, consider the pros and cons.
FAQs
How does not using a mortgage affect my credit?
This depends on what mortgage-free home purchase plan you go with. Of those listed above, paying cash will not affect your credit because you won’t have regular payments to make. Seller financing, renting to own, and using a government loan can all affect your credit because they require regular payments.
In addition, if you opt for a home purchase option that doesn’t require a credit check, your credit score won’t dip from a hard credit inquiry. These inquiries can temporarily cause a decrease in your score, but you won’t have that problem if you pay in cash, rent to own, or use owner financing.
However, while this may sound like a good option to prevent your credit from falling, your score also won’t increase. So if you’re avoiding a mortgage because of poor credit, you may want to address those issues before attempting to make a big purchase.
Can I buy a house if I already have a mortgage?
Yes. If you have good credit and meet all other requirements for getting a mortgage to buy another house, you can do so. That said, if you damaged your credit score with missed payments on your current home loan, you may not get as large of a home loan.
On the other hand, if you’re a real estate investor who often buys and sells homes quickly, you’ll want to make sure you have a good enough credit score to secure a down payment loan if one house doesn’t sell before you buy another one.
Is there a deadline for getting a mortgage?
No, there is no deadline to get a mortgage unless your particular circumstances dictate otherwise. For instance, getting a mortgage under a rent-to-own arrangement may call for some kind of deadline, but in that case, the deadline would be the end of your rental term.
However, this may change depending on whether the buyer or seller has any contingencies. A mortgage contingency clause, for instance, often has a deadline for the buyer to find financing, which is usually between 30 and 60 days. If the buyer can’t find financing before that time, they can pull out of the sale.
Key Takeaways
- You have several options for buying a house without a mortgage. This includes owner financing, renting to own, using a government loan, using a private loan, and paying cash.
- There is no official deadline to get a mortgage unless you are in a rent-to-own contract, which usually stipulates that you buy the house before the end of your lease term.
- Not having a mortgage will not hurt your credit, but it also won’t benefit your credit either.
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