Home buying can be stressful, especially when you don’t understand which financing options are the best fit for you. While the most widely known home loan is a conventional 30 or 15-year loan, there are plenty of alternatives that you may not know about that may be a better fit for your needs.
This article will walk through four specialty home loan options and outlines the ideal home buyer for each type. Here’s the preview:
What is it? A reverse mortgage is unique because instead of paying a monthly mortgage payment, you receive a check in the mail each month from your lender in exchange for your home’s equity. For typical homeowners, you start with having little equity at the beginning of your loan while increasing equity over time. For a reverse mortgage, you’ve already built up significant equity in your home while cashing out on your home’s decreasing equity over time. Disclaimer, there are various fees that you’ll have to pay when you do take out a reverse mortgage loan, making it important for you to ensure that the equity that you have built is greater than the high fees you’ll be required to pay.
Who is the ideal borrower? A reverse mortgage is specifically designed for those that are age 62 or older. Many seniors switch to a reverse mortgage so that they can supplement income during retirement, pay off stubborn debt, and eliminate their mortgage payments. Those that have a large amount of equity in their home will be the ones to benefit the most from a reverse mortgage. It’s a unique way to have financial security in your later years.
Investment Property Loans
What is it? An investment property loan is typically a short-term loan used to fix and flip a house for profit. What makes an investment property loan unique is that the loan is typically funded through a private lender, often known as a hard-money lender, and is structured differently than a typical bank loan. The hard-money lender will loan around 70% of the property’s after-repair-value, and you’ll have to front the remaining amount. The lender then becomes the lien on the property, meaning that it can use the property as collateral if you default on the loan.
Who is the ideal borrower? An investment property loan from a hard money lender is ideal for borrowers that want a loan fast with more flexible loan terms. A hard-money lender is willing to work with riskier borrowers because they are more concerned if the property has the potential to sell and make a profit. Finding the right property to invest in is more important than finding a borrower with clean credit and debt history. For example, you won’t need a great credit score or awesome debt-to-income ratio to secure a loan with a hard-money lender—they want to see if you are able to front your portion of a down payment for a property that could be profitable.
What is it? USDA stands for the United States Department of Agriculture. This government-backed loan is focused on creating economic growth in rural areas by making housing more affordable. A USDA loan makes homeownership more attainable for two main reasons. First, a USDA loan has a down payment requirement of 0% or no money down. Second, the interest rate will most likely be lower in comparison to a traditional mortgage in your area. These key benefits make the dream of homeownership more accessible to people living in more rural communities. For more detailed information, check out this article that offers a deeper look into USDA loans.
Who is the ideal borrower? If you are moving to a small town or currently living in a small town, then a USDA loan is a great option for you. The biggest factor in determining who qualifies for A USDA loan is location. A rural area can typically be categorized as a town that has a population of 35,000 or less. However, there have been several cases where some suburban areas in outlying cities are zoned officially as a rural area—you can check the official USDA zones for your area online. In addition to location, income is also a big factor. Those with lower income will have a better chance of qualifying for a USDA loan, but income level requirements will vary by state.
What is it? A home renovation loan makes it easier to buy and finance a fixer-upper. It lumps together the cost of the house and potential renovation costs into one loan. This means that you won’t have to worry about paying out-of-pocket renovation expenses, and you won’t have to worry about managing two separate payments. You’ll be able to conveniently access cash from your renovation loan from the day that you get the keys to the house.
Who is the ideal borrower? If you are looking to flip a house for yourself or for profit, a renovation loan is a great option. Having so much cash accessible upfront means that you can get to renovating sooner. You won’t have to drain your savings or wait for your paycheck to come in. You’ll have the safety net of the loan at your fingertips, helping you to renovate quicker and move in or put the house on the market sooner. You may not need a renovation loan if the house you are planning to flip does not need too many repairs. If that is the case, it may be wiser to take out a conventional mortgage and then use a home equity loan or a personal loan to fund those additional, smaller renovations.
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from APR rates to home-buying tips. Follow her on Twitter @maddie_mingus for weekly doses of thought-provoking financial content and a chance to connect — don’t be shy!