6 Ways to Finance a Home Purchase

Buying a home is a big deal. For many, homeownership can seem like a dream. It’s the most significant purchase most people ever make and can be a daunting undertaking. However, it’s more within your grasp than you may think. 

To make the process easier, it helps to understand how you can finance a new home. Thoroughly research and consider all of your options and be sure you have a solid understanding of your current financial circumstances to find the right choice for you.

1. Conventional Loan

The most common way people buy their homes is with a conventional mortgage loan through a bank or credit union. To get approved for a home mortgage, you typically need a credit score of at least 620. Credit score isn’t the only factor, though. You also need to consider your debt-to-income (DTI) ratio.

The DTI measurement describes how much of your income will go to debt payments once you take on a home loan. Lenders look at DTI to determine how much they believe you can afford to pay back, and therefore, the loan amount. The better the ratio, the more you can get.

A conventional home loan is a good choice if you have saved money for your home purchase. The more you can put down at the beginning, the less you’ll pay monthly. Know that you may have to buy private mortgage insurance if you pay less than 20% for the down payment.

2. Government-Issued Loans

The Federal Housing Administration (FHA) offers mortgages with lower down payment amounts. It also has less stringent requirements for credit scores. Consider an FHA loan if you don’t have much for a down payment, and your credit score is low. On the other hand, there are additional fees, including a mortgage insurance premium. Use an FHA loan calculator to see what your payments would be if you used this kind of loan.

If you are a veteran, you can look into Veteran Affairs (VA) options. The VA guarantees loans from qualified lenders that have special terms for veterans. The United States Department of Agriculture (USDA) also offers loans for rural development, which can be helpful if you’re purchasing a home as part of a plan to start a development project in a rural area. These have income requirements, so make sure you know what they are before applying.  

3. Borrow From a Retirement Fund

In general, financial experts don’t recommend borrowing from your retirement plans. However, there are ways to make it work for a home purchase. If you’ve been contributing to an IRA or 401(k), look at the terms to see if you can use the money penalty-free for a home purchase.

Most IRAs come with a clause that allows you to use as much as $10,000 from the fund for a down payment without penalty or taxation. Many 401(k)s have a similar clause, which may allow you to use up to $50,000. Some may require you to repay the funds within five years to avoid penalties.

4. Seller Financing

Here is an unusual but valid option. Particularly motivated home sellers may be willing to finance you directly, without your having to go through a bank. A good match for this type of financing is a seller who has paid off the home and a buyer struggling to qualify for a traditional loan. Read any agreement carefully before you sign, and have any agreements reviewed by a lawyer. The terms can be pretty tough in terms of defaulting, and rates may be high.

5. Rent-to-Own

Another way to work with the seller is to agree to a rent-to-own deal. If you’re eager to buy but don’t have the funds or the credit score, consider making an agreement with the seller. Typically, this means you rent the home as you save money and work on your credit score. The owner agrees to sell you the home when you’re ready. They may even let you put some of the monthly rent toward the purchase price.

6. Boost Funds For a Down Payment

If you have good credit but not enough money for a down payment, find ways to get those funds sooner. Here are some creative ideas:

  • If you’re getting married, ask for cash toward a new home instead of gifts.
  • Set up a crowdfunding campaign to build up your down payment.
  • Look for down payment assistance programs in your city or state.
  • If your parents plan to have an inheritance to leave you, ask for funds now to purchase your home.

To Get a First Home, Get Creative

A traditional mortgage may still be the most common way to buy a home, but it is not the only option. Young people today have been forced to get creative in a tough buyers’ market and the difficult job market. Try some of these ideas to finance and raise funds for your first home purchase.