6 creative home financing ideas to consider

Today’s housing market is tough for hopeful homebuyers. The combination of high prices and high mortgage rates means that many potential buyers find themselves priced out of the market altogether — or out of the typical methods of mortgage financing, anyway.

It’s no wonder: The U.S. is in the throes of an ongoing housing shortage, driving up prices on what little inventory is available. And mortgage rates have skyrocketed in recent years, rising from around 3.25 percent for a 30-year fixed at the end of 2021 to 8 percent by late 2024. As of mid-May, Bankrate’s latest survey of large lenders showed an average 30-year fixed rate of 7.12 percent.

Fortunately, whether you’re unable to qualify for a conventional mortgage or just want to explore all your options, there are other, less traditional financing methods out there. Here are six alternative, more creative home financing ideas for eager homebuyers to think about. (Some have a certain amount of risk involved, though, so consider your financial situation carefully.)

1. Down payment assistance programs

Saving enough for a down payment can be a huge barrier to homeownership. Most state and local governments offer down payment assistance programs, which provide a low-risk method of getting some much-needed financial help. Each program will have a different set of qualifications that must be met, but they are typically offered mostly to first-time homebuyers, buyers with low or moderate incomes and people who plan on using the home as their primary residence.

Taking advantage of one of these programs does not exclude you from needing a mortgage — you will still need one — but many come in the form of grants that don’t have to be paid back. They may also take the form of low-interest or zero-interest loans, deferred-payment loans or forgivable loans, which typically don’t need to be paid back as long as you remain in the home for a specified period of time.

Nonprofit programs

Relatedly, there are also nonprofit programs that can provide assistance. These programs are often exclusively for first-time buyers whose incomes are significantly lower than the median income in the area where they live, and specific criteria must be met.

One such program is the Neighborhood Assistance Corporation of America, or NACA. NACA offers low-rate mortgages that do not require a down payment, closing costs or mortgage insurance to low- and moderate-income borrowers who qualify. And rather than basing qualification on your credit score, it uses other, “character-based” criteria, such as your rent-payment history.

2. Government loan programs

There are also mortgage programs backed by U.S. government agencies. Many come with low or even no down payment requirements, if you qualify, and many have lower credit score requirements as well:

• VA loans: Available to active-duty military members and veterans, as well as some military spouses, VA loans are guaranteed by the U.S. Department of Veterans Affairs. For qualified borrowers, most require no down payment and have low or no minimum credit scores.
• FHA loans: An FHA loan is insured by the Federal Housing Administration. These loans have lower down payment and credit score requirements than conventional loans and are especially popular among first-time buyers. However, they do require the buyer to purchase mortgage insurance.
• USDA loans: Buyers in rural areas may qualify for a USDA loan. These were created by the U.S. Department of Agriculture to encourage homeownership in non-urban regions — the home must be located in a USDA-approved area. These loans require no down payment and tend to have looser credit requirements than conventional mortgages.

3. Balloon and piggyback loans

These unusual types of mortgages both have major disadvantages, but they can be useful in certain situations. A balloon mortgage is so named because it involves a relatively short length of time with low or even no monthly payments, followed by one big lump-sum payment at the end of the term, known as a balloon payment. These are not very common because they’re risky for both the borrower and the lender: You might be lulled into a false sense of security in the first few years, but you will still owe the full amount in the end, so you must be sure you’ll be able to afford the full amount by then. House-flippers often like these loans because when they sell the house, they are able to put the proceeds toward the balloon payment.

A piggyback loan carries less risk, but it does have downsides. As the name implies, it is really two mortgage loans, one piggybacking on the other. This means two different interest rates, two monthly payments and two sets of closing costs. Piggyback loans are often referred to as 80/10/10 loans because you get one loan for 80 percent of the purchase price and one for 10 percent, with the remaining 10 percent being paid upfront as the down payment. The benefit is that it can eliminate the need for private mortgage insurance.

4. Rent-to-own

Sometimes called a lease-to-buy program, renting to own a home is not unlike leasing a car: You rent the place for now, with an option to buy it later. Typically, a pre-arranged contract spells out the terms of the eventual purchase, including the price, and the tenant may choose to exercise the purchase option or not. Often, a portion of the rent payments is applied toward the purchase price if the tenant decides to buy. These arrangements can be great for those who can’t afford to buy a home yet but are diligently working their way toward it. However, if property values change drastically or you are still unable to afford a mortgage at the end of the rental term, you could lose money or run into other issues.

5. Seller financing

In rare cases, a buyer may be able to secure financing directly from the seller of the home, particularly if the seller owns the home free and clear. Seller or owner financing is similar to a traditional mortgage, but rather than a bank lending you money, the home’s owner is lending it to you and taking on the debt themselves. This may be beneficial to buyers who would not qualify for financing otherwise — in some cases, buyers may take out a mortgage for part of the purchase price and finance the rest via the seller. However, these situations usually involve a much higher interest rate than a standard mortgage, and they often require a balloon payment as well.

6. Borrowing from a retirement account

Finally, if you’re really between a rock and a hard place, you could potentially borrow from a retirement account to pay for your home — but it’s a risky step. Taking out a 401(k) loan is generally not recommended. There are likely to be limitations on how much you can take out, and doing so could mean paying penalties and taxes. And even though you’re borrowing your own money, you’ll still have to pay yourself back, with interest.

In addition, remember that your 401(k) is tied to your job — if you leave your current job for whatever reason, you may have to pay the money back more quickly than you’d anticipated or risk tax and early-withdrawal penalties. And you can’t borrow from a 401(k) from a company you no longer work for unless you’ve rolled it over into another account.

Bottom line on how to finance a home

If you don’t qualify for a conventional mortgage right now, there are several nontraditional, alternative ways to finance a home purchase — or at least help to finance it. However, while some options are solidly government-backed, others are very risky. Do your research and be sure you’re choosing a financing method that will work for your specific needs. It may be smart to consult with a financial advisor as well.