Obtaining a mortgage can be an absolute nightmare if you do not have your finances in order. The idea of getting a mortgage can be rather easy provided you have a two-year history of working, a good credit score, and saved enough for a down payment.
The problem is that not everybody has these things in order which is why they rent. Some people can be fortunate enough to get a land contract where the owners of the house are considered the bank.
The benefits of having a land contract far outweigh that of merely renting because your payments will count towards the balance. In most cases, people pay on a land contract until the house is paid off or until a balloon payment is due.
Sometimes the balloon payment alone can be a scary idea but if you are saving enough money on the side it should not be an issue. If it is an issue, you could always apply for a refinance at a credit union, where the interest will most likely be lower than your land contract.
In this case, you will be able to show an established payment history, which will improve your chances of getting the refinance.
Often it takes a co-signer, somebody close and trusting to help clear the path. This can be risky on their part depending on how well you know or trust each other. Some close friends or family members may have no problem helping out but most are too cautious with their money.
If you are having trouble or worried about getting a mortgage because your credit history is poor and your finances are in shambles, worry not. There is more than one way to secure a mortgage, you just have to know where to begin.
Traditional Mortgages
A mortgage is a loan specifically designed for buying a home or other real estate property. It is a common way to borrow a large sum of money to purchase your dream house, which you will then pay back over time, usually many years.
Often times people rent too long without consideration of a mortgage because they are unsure about them. Mortgages are quite easy to understand.
Here are the key components of a mortgage:
- Principal. This is the original amount of money you borrowed from the lender. For example, if you buy a $300,000 house and make a $60,000 down payment, your principal would be $240,000.
- Interest. This is the cost of borrowing the money. It is calculated as a percentage of the principal and is added to your monthly payments. The interest rate can significantly affect the overall cost of your mortgage.
- Loan Term. Refers to the length of time you have to repay the mortgage. Common loan terms are 15 or 30 years. A longer loan term means lower monthly payments but higher overall interest paid over the life of the loan.
- Amortization. The process of gradually paying down the mortgage over time. An amortization schedule shows how your monthly payments are divided between principal and interest. In the early years of a mortgage, a larger portion of your payment goes towards interest. As time goes on, more of your payment goes towards the principal.
Keep in mind not to max out your income on a house payment because you should still have enough to save. Consider buying a less expensive house to fix up and sell, or rent out for some passive income.
Types of Mortgages
A mortgage can be obtained through a traditional bank or a credit union. Deciding between the two depends on your priorities and individual circumstances. Going with a credit union will generally offer lower interest rates.
Banks offer convenience through widespread branches and a wider range of services, along with more advanced technology. However, they may come with higher rates, less personalized attention, and potentially stricter approval standards.
While credit unions often shine with lower rates, personalized service, and potential leniency in approvals, they may have membership restrictions, limited locations, and fewer product offerings.
Common mortgage types include:
- Fixed-Rate Mortgage. The interest rate remains the same throughout the life of the loan, providing predictable monthly payments.
- Adjustable-Rate Mortgage. The interest rate can change periodically, usually in relation to a specific financial index. This means your monthly payments can fluctuate over time.
- Other Mortgage Types. There are other specialized mortgages, such as government-backed loans (FHA, VA) and interest-only mortgages, each with its own terms and eligibility requirements.
For government-backed loans, lenders can offer more favorable terms to borrowers who may be considered higher risk. This translates to lower credit score requirements, smaller down payments, and more.
While these loans are a valuable tool for many, be sure to weigh the advantages against potential drawbacks, such as mortgage insurance premiums or specific eligibility criteria.
Related Article: “Mortgages Made Easy: How to Apply & What to Expect“
Land Contracts
A land contract, also known as a contract for deed or installment sale, is an agreement where the buyer makes payments directly to the seller for the property, instead of obtaining a traditional mortgage from a lender. Essentially, the seller acts as the bank.
This arrangement can be beneficial for buyers who may not qualify for a conventional mortgage due to credit issues, limited income, or a lack of down payment funds.
It also offers flexibility in terms of negotiations, potentially leading to lower interest rates or customized payment plans. Sellers can benefit from a quicker sale, potentially higher sale price, and a steady income stream.
Land contracts carry risks for both parties. Buyers may face challenges if the seller has existing liens on the property or fails to transfer the title properly after the final payment.
They also often have fewer legal protections than with a traditional mortgage. Sellers risk losing money if the buyer defaults and may encounter difficulties removing the buyer from the property.
Land contracts can be a viable option for buyers with credit challenges, those seeking unique financing arrangements, or individuals looking to purchase property in areas with limited lending options.
They can also be attractive to sellers who want more control over the sale process or prefer passive income.
If your contract expires and you do not have enough for your balloon payment, then you could always obtain a refinance from your local bank or credit union.
What Happens if Your Landlord Dies?
When a landlord who is selling property through a land contract dies, the agreement typically remains valid. The deceased landlord’s estate takes over their responsibilities, meaning the estate’s executor or administrator will manage the ongoing transactions like receiving payments and ensuring the deed is transferred to the buyer once the contract terms are fulfilled.
This process often involves the probate court, which oversees the estate’s administration and ensures the contract is properly followed. While probate proceedings might cause some delays in the final property transfer, the buyer’s rights under the land contract are generally protected.
They can continue making payments to the estate and expect to receive the deed as originally agreed. To avoid potential issues, it is important to have a well-drafted land contract that clearly addresses the scenario of the seller’s death and outlines the estate’s responsibilities.
If you find yourself in this situation, seeking legal advice is always recommended to navigate the process smoothly and protect your interests.
Refinancing
Refinancing is essentially replacing your existing mortgage or land contract with a new one, often with different terms and a new interest rate. Think of it as a do-over on your home loan.
This will give you a chance to save money or adjust your loan to better suit your current financial situation. During a refinance, you will most likely get charged an initial fee that can be rolled into your current balance.
Here is a breakdown of refinancing, along with key components:
- Rate-and-term Refinance. Change your interest rate, loan term, or both.
- Cash-out Refinance. Borrow more than your current mortgage balance to access cash.
- Cash-in Refinance. Make a lump-sum payment towards your principal to reduce your loan amount and potentially secure a lower interest rate.
- Streamline Refinance. A simplified process for government-backed loans (FHA, VA) with less paperwork and potentially lower closing costs.
Carefully consider your financial goals and compare offers from different lenders to find the best refinancing option for your needs. Be smart with saving this extra money so you can stay ahead financially.
Need a Co-signer?
For those with limited credit history or a smaller income, the path to mortgage approval might require a co-signer. This individual agrees to share the responsibility of the loan, bolstering your application with their stronger financial standing.
While a co-signer can increase your chances of approval and potentially secure a lower interest rate, it is a significant commitment for both parties. The co-signer becomes equally liable for the debt, making it crucial to understand the risks involved before entering such an agreement.
For the borrower:
- Rewards. Increased likelihood of loan approval, potentially better interest rates, and an opportunity to build credit history through responsible repayment.
- Risks. Damaged credit score if they fail to make payments, a strained relationship with the co-signer if they rely on them to make payments, and potential legal repercussions for defaulting on the loan.
For the co-signer:
- Rewards. Satisfaction of helping a loved one achieve homeownership, a potential opportunity to help the borrower improve their credit score.
- Risks. Damaged credit score if the borrower defaults, financial strain if required to make payments, difficulty obtaining future loans due to increased debt-to-income ratio, and potential legal complications and strained relationship with the borrower.
Open communication, a clear understanding of the responsibilities involved, and a strong financial plan are crucial for a successful co-signing arrangement. This idea could also be presented as a business opportunity for both parties.
Mortgages and Marriage
Navigating mortgages can be particularly nuanced for married couples. While joint applications are common, there are situations where a spouse might seek a mortgage solely in their name.
Lenders will scrutinize the individual’s creditworthiness, income, and assets to determine eligibility. State laws regarding property ownership also come into play, adding another layer of complexity.
Understanding these factors is vital for making informed decisions that align with both individual and shared financial goals
There are situations where a married couple is trying to get a mortgage but only one spouse works. If this is the case, it may be easier for that spouse to obtain a mortgage solely in their name.
This all of course comes down to various legalities within your marriage and how you decide to work it out. Married couples that are committed will put aside their ego and understand they are in the same boat.
A solid couple will fight together and come up with enough ideas to ensure they can secure a home. They will put the idea of whoever is the ‘bread winner’ to rest and realize circumstances can change overnight.
When applying for a mortgage this way, the lender will consider the following:
Individual Credit History
- Credit Score. A strong credit score demonstrates your history of responsible credit management and is a major factor in determining your interest rate and loan approval.
- Credit Report. Lenders will review your credit report for any red flags like late payments, collections, or high credit utilization.
- Spouse’s Credit. Even if your spouse is not on the loan, their credit history might be considered in some cases, especially if you live in a community property state.
Income and Employment
- Stable Income. Lenders want assurance that you have a steady and sufficient income to make your mortgage payments. They will look at your employment history, pay stubs, and tax returns.
- Debt-to-Income Ratio (DTI). This ratio compares your monthly debt obligations (including the proposed mortgage payment) to your gross monthly income. A lower DTI indicates you have more financial capacity to handle the loan.
Assets
- Down Payment. A larger down payment shows your commitment and reduces the lender’s risk, potentially leading to better loan terms.
- Reserves. Lenders like to see that you have savings or other liquid assets to cover unexpected expenses or potential financial hardships.
State Laws Regarding Property Ownership
- Community Property States. In these states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), assets acquired during the marriage are generally considered jointly owned, regardless of who is on the title. This means your spouse may have ownership rights to the property even if they are not on the mortgage. Lenders in these states may require your spouse to sign documents acknowledging they are aware of the mortgage, even if they are not a borrower.
- Common Law States. In most other states, property ownership is determined by whose name is on the title. However, even in these states, lenders might consider your spouse’s financial situation if you are relying on their income or assets for qualification.
Important Considerations
- Liability. If you are the sole borrower, you are solely responsible for the mortgage payments.
- Future Financial Changes. Consider how life events like divorce or job loss might impact your ability to manage the mortgage on your own.
- Legal Advice. It is always advisable to consult with a legal professional to understand the implications of obtaining a mortgage solely in your name, especially regarding property ownership and potential liabilities in your state.
Regardless of your current situation, after reading this article you should now have a better understanding of how to get your dream house. Whether it is from a mortgage or a land contract to begin, at least you will be paying towards something instead of renting.
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