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When you’re buying a home, creative financing can make all  the difference in closing the deal. There are many paths other than the standard 20% down. Let’s look at some of them.

FHA-insured loans

These loans are available from most lenders and only require a credit score of 580 and 3.5% down. Their interest rate is typically lower than conventional loans but have substantial mortgage insurance monthly payments. For borrowers who can not afford to wait while they improve their credit score, this can be the easiest loan to obtain.

Fannie Mae & Freddie Mac loans

These loans are also known as Conventional loans and typically require a 20% down payment. However, if you qualify as a first time home buyer, you can ask for their 3% down payment loan. These loans require a minimum of 620 to 640 credit score and may restrict you to certain areas.

Low-income loans

There are a number of these loans and each has their own requirements. Typically, they require better FICO scores (680+) and household income to be at 80% or less of the area median income

Assistance programs

These programs cater to various levels of income, including one with no limit on the income. As with low-income loans, credit score requirements tend to be higher. Usually these programs are second loans working in conjunction with FHA or Conventional loans. While the assistance can be interest-free, usually the rate of the first loan is higher than market rates. Most assistance programs require the borrower to pay back the interest free loan when the home is sold, refinanced or the first loan is paid off.


Probably the most talked about alternative to a bank loan, rent-to-own is the riskiest approach to home ownership. If you don’t know what you are doing you will easily find yourself paying a lot of money to rent the place for a few years. Then you will have to move out with nothing to show for all the money you have paid.

40 year mortgages

In the continuing efforts to make home ownership more affordable, the 40 year (instead of 30 year) mortgage is returning once again to center stage. While not every lender offers this loan, it is gaining in popularity. As an example, a $500,000 home at 5.5% interest rate with 3% down will have a 30 year loan monthly payment of $2,753.78. The same loan over 40 years will have a monthly loan payment of $2,501.49.

Other approaches

In the past, when rates were high, borrowers would arrange for the seller to carry some part of the overall cost of the home as a second mortgage. Today we are seeing a different approach. Rather than carry a loan privately, the seller is asked to pay the borrower’s lender an amount that allow for the interest rate to be lowered. This is known as a rate buy-down. This creative financing is relatively new and seems to be gaining acceptance.

Naturally, creative financing is only limited by the people involved. As both interest rates and home prices continue to rise, we are sure to see more and more creative ways to bring buyers and sellers together. Rather than dismissing these approaches, you should ask for terms/details in writing. Then find a lawyer and/or financial person to help you understand the consequences of these terms. If you are working with a lawyer, chances are that some of the terms will be renegotiated to make the contract more balanced. That is to say so that seller and buyer share the risk equally, or nearly so.

Because creative financing can be used to the disadvantage of one side, usually the borrower, take the time to understand what you are getting into. If you have questions, contact me at 760 622 5087 or [email protected]

Happy home hunting!

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