Real Estate

7 Creative Home Financing Ideas

By Tom Burchnell
creative home financing ideas

Getting a mortgage isn’t easy and sometimes you need to get creative in your home financing ideas.

First, you need a down payment of at least 3 percent. That doesn’t sound like a lot, but keep in mind that the average home costs $374,900. Three percent of that is $11,247. That’s the bare minimum. The average down payment is closer to $29,000.

You also take on a typically large loan balance—an average of $260,386. You pay that back with interest, the average rate of which is 4.04 percent for a 30-year fixed mortgage.

You’ll probably be able to get decent rates if your credit score is 680 or higher, but anything below that will drive up your interest rate and final interest total.

There are a lot of hurdles in the application process, some of which may seem too large to surmount. But if you think outside the box, you can find creative home financing ideas.

1. Non-Qualified (Non-QM) Loans

One of the common home financing ideas is non-qualified (non-QM) loans. Let’s take a closer look at how these work.

Suitable for buyers who:

  • Have experienced foreclosure
  • Have low credit scores
  • Have self-employed income or other income that is difficult to document

As its name indicates, a non-qualified mortgage or non-QM loan is any home loan that doesn’t meet all four directives that the Consumer Financial Protection Bureau set to prevent over-borrowing. These requirements include:

  1. A fully documented ability to repay the loan
  2. Few to no risky features like a balloon and interest-only payments
  3. Limited lender fees
  4. Debt-to-income ratio limits

Non-QM loan borrowers still have to be able to repay the loan. Every loan on the market has that requirement. Non-QM lenders just have to work harder to qualify you. 

In return, they charge interest rates that average 1.25 percentage points above market norms.

2. “Aspirational” Non-Prime Loans

Aspirational Non-Prime loans are home financing ideas that people can pursue. Let’s look closer at this option.

Suitable for buyers who: 

  • Are self-employed 
  • Have low credit scores 
  • Have experienced adverse financial events

Some non-bank lenders target borrowers who have trouble qualifying for loans but who could improve their finances enough to do so in a few years. These lenders serve non-prime borrowers by offering special considerations, including:

  • Bank statements as income verification for self-employed borrowers
  • Significant savings balances counted as income
  • Borrower credit scores below 500 allowed

Borrowers who need these considerations pose higher than average risk, which the lender balances by charging higher interest rates and requiring down payments of up to 40 percent

3. Rent-To-Own

One of the creative home financing ideas that is growing in popularity is Rent-to-Own. Let’s see if this might be a good solution for your needs.

Suitable for buyers who: 

  • Have bad credit
  • Can’t afford a down payment 
  • Don’t qualify for a mortgage but could in the future

Rent to own is just what it sounds like. A potential buyer and seller agree to be landlord and tenant temporarily but establish a future purchase option.

Sellers count monthly rent and sometimes the cost of the purchase option toward the ultimate purchase of the home, so you can think of your rental payments as contributions toward a down payment. Meanwhile, every on-time payment helps to build your credit score.

The arrangement is completely peer-to-peer. The parties involved set their own monetary and timeline terms, so there are no standards or minimum requirements.

There are risks, however. For instance, the seller could wind up with a lien on the property, making the sale difficult. Or real estate prices could fall, leaving you stuck between losing your option payments and owing a large down payment to make up the difference.

If you’re thinking seriously about rent-to-own, consult a lawyer. 

4. Borrowing From Your IRA or 401(k)

Borrowing from your IRA or 401(k) is one of the other creative home financing ideas people look into when they need cash to reach their goals. But who can this help and how does it work?

Suitable for buyers who: 

  • Have significant retirement savings but not enough cash for a down payment
  • Are self-employed with IRA accounts

You can take money from your retirement account to buy a home, but the rules are different with 401k accounts than IRAs. If you have a traditional IRA and you’re a first-time homebuyer, you can withdraw up to $10,000 for a down payment without paying the regular 10 percent early withdrawal penalty, but you still have to pay taxes on it.

Roth IRAs always let you withdraw contributions tax-free and without penalty since you pay taxes on the income before you contribute. First-time homebuyers can withdraw up to $10,000 in earnings from the Roth IRA, but only if you’ve had the account for at least five years.

A 401k doesn’t exempt home buyers of any sort from early withdrawal penalties, but you can borrow against it up to $50,000 or half the account balance. You can use that money for a home purchase, but you have to pay it back or face penalties on any remaining balance.

5. Crowdfunding

Next on the list of creative home financing ideas is crowdfunding. Let’s see who can benefit from this method.

Suited for buyers who: 

  • Have large social networks 
  • Can’t afford a down payment
  • Can source other financing for the balance

If you know enough people or can make a good case for your financial need, you can crowdfund your home purchase. You can use a general crowdfunding site like Kickstarter or GoFundMe, or you can go with a specialized site like Feather the Nest

People often use this in lieu of a traditional wedding registry, but you can use it to celebrate any life milestone. Even if that milestone is the home purchase itself.

These arrangements generally don’t pay for everything, so you’ll still have to qualify for a mortgage. If that’s the hard part for you, crowdfunding probably isn’t the answer.

6. Sale-Leasebacks

Creative home financing ideas can come in all different shapes and sizes. One of the options that is lesser known but growing quickly in popularity is a flexible sale-leaseback solution.

Suitable for buyers who:

  • Need time to improve their credit
  • Are still saving for a down payment
  • Want to be able to buy before they sell

Maybe you’re ready to move but your finances aren’t. Or you want to take some time with this big life decision and not just rush into selling because you’ve found a home to buy. Either way, sale-leaseback programs exist to give you the freedom you need.

Of all the creative mortgage options out there, this is one of the most straightforward. A sale-leaseback solution buys your home and you rent it back. You convert your equity to cash to use it toward a down payment on a new home, improve your existing home, and more.

If you’re not interested in moving out of your home, sale-leaseback solutions hold other options. Other programs allow you to stay as a renter and even eventually repurchase your home.

Suitable for buyers who: 

  • Have fallen behind or defaulted on their mortgages 
  • Aren’t sure if they want to move or can’t afford it 
  • Have trouble qualifying for loans but have plenty of equity

Some home sellers don’t actually want to sell; they just can’t afford their mortgage anymore. Others have bad credit or unstable income but have plenty of money in equity. For these homeowners, a sale-leaseback serves as a solution.

Key Takeaways

If you’re struggling to get approved for a traditional mortgage, don’t give up! There are plenty of other creative home financing ideas out there, aimed at people in all kinds of financial situations. At least one solution exists that’s perfect for you. Talk to a financial consultant to figure out what works for you.

Tom Burchnell
Written by Tom Burchnell
Director of Product Marketing

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.