Check Out These Unique Mortgage Loans
When looking for a home loan, you might think you know the best mortgage program to choose. But if your situation isn’t standard, the more common loan programs might not be the best choice.
However, there could be other loan programs that are a better option. Some niche loan programs that you’ve never heard of could be a better fit for your situation.
Taking advantage of these niche loan programs could allow you to buy a home in a situation where you didn’t think it was possible.
We take a look at four mortgage options you might not realize exist.
Family Opportunity Mortgage
When lenders assess borrower risk, they usually find owner-occupied homes to be a lower risk. They will offer the lowest rates and best terms because they expect the owner to try harder to ensure they make payments. When lending on vacation homes and other non-occupied properties, it is more likely that the borrower will default on that first should they face financial challenges.
If you are looking to qualify for a mortgage to purchase a home for your elderly parents or a physically challenged child, it can be difficult. Without sufficient income of their own, they may be unable to qualify for a mortgage directly. A Family Opportunity Mortgage from NRL could be the answer that allows you to purchase with terms similar to owner-occupier loans.
If you have elderly parents or an adult child you would like to help live in better conditions, perhaps near you, there are options. If nursing homes and other types of medical facilities aren’t suitable, and renting isn’t ideal, buying a second home might seem like the best option. However, lenders will usually require a large down payment, and the interest rate will be higher. Homeowner’s insurance premiums will also be more costly on a second mortgage.
The Benefits of a Family Opportunity Mortgage
With a Family Opportunity Mortgage, there is a minimum 5% down payment and interest rates in line with owner-occupied home loans. Your elderly parent or adult child with special needs, won’t have to pay the mortgage, and their credit isn’t a factor considered by the lender.
When applying for a home loan, your debt-to-income ratio will be used to ensure you aren’t over-committing based on your income, which can be more of an issue when purchasing a second home. You might already have mortgage payments, along with car payments, credit card bills, and more, to come out of your monthly income. For this reason, the NRL Family Opportunity loan product allows a higher debt-to-income ratio of up to 50% of gross income.
Debt-Service Coverage Ratio Mortgage
When buying an investment property, you could use the rental income to help with financing the purchase. The debt service coverage ratio (DSCR) mortgage allows you to qualify without providing tax returns or other documents to prove income.
The lender will require the rental income from the property to meet their coverage ratio. If the coverage ratio is 1.0, the lender will need rental income to meet the mortgage payments. When rental income is lower than mortgage payments, the lender will require reserves to cover the difference.
The buyer might not need to worry about their income or debt-to-income ratio, but credit score is still relevant. Also, the lender will typically want a down payment of at least 20%, and interest rates are likely to be higher as well.
Calculating the DSCR
With a signed lease agreement, the rental income can be used to calculate the DSCR. Without this, a rent schedule from the appraisal report can be used.
The gross rental income divided by the loan payment, including the principal, interest, taxes, insurance, and association fees (PITIA), gives the DSCR. The DSCR shows the lender how much risk is involved in the purchase. If the DSCR is higher, there is less risk for the lender, and they might offer better terms.
Typically, the lender will want to see a DSCR of 1.00 or higher. Though, if the ratio is only just above 1.00, there isn’t much room to deal with drops in income. If the income does fall, there is a greater chance of the borrower defaulting, so lenders often like to see a DSCR of 1.2 and above.
The property you want to buy will have to meet this DSCR requirement and other eligibility rules set out by the lender. However, if you meet these requirements, you can use this type of loan to grow your rental business portfolio.
Bank Statement Loans
If you are self-employed, a bank statement loan could be a better option. While these were more common before the financial crisis, they are still available to some buyers.
If you are a business owner, making the most of deductions to reduce your tax bill is wise, but this doesn’t help when qualifying for a loan. Lower income could mean you won’t qualify for the loan you want, but a bank statement loan allows you to use more documentation to prove your income.
Using bank statements for the past one or two years will better show the income the business generates. Despite what your tax return says, using bank statements could help show the lender a more accurate picture of your income. These statements will show the lender your average deposit so they can judge your annual income.
The Benefits of Bank Statement Loans
As well as allowing qualification for a higher loan amount than tax returns might suggest, lenders don’t require these tax returns or other proof of income aside from bank statements.
The lender might allow down payments of 10%, though the interest rate on the loan can be slightly higher compared to conventional loans. This method of approving a loan helps home buyers qualify for a larger loan than they would otherwise.
A jumbo loan of up to $3,000,000 could be financed with this type of loan. It is also easier to buy investment properties with a bank statement loan if you are self-employed.
VA Second-Tier Entitlement
If you are on active duty, in the reserves, or the spouse of a veteran, you might benefit from the VA second-tier entitlement. It allows borrowers to finance a home even after default and could permit having two VA loans at the same time.
If you already have a VA loan, you need to be current on your payments for the last 12 months. You shouldn’t have issues with your credit report either, and there needs to be a good reason for the second purchase. This might be a PCS (Permanent Change of Station) or a change in your family’s situation, like caring for an elderly relative.
However, while buying a rental property isn’t what the loan is designed for, you might be able to rent out the first home to cover the payments on the second. A formal lease agreement can improve the debt-to-income ratio with set rental amounts and terms. The lender will look carefully at the applicant’s debt-to-income to make sure they can cover both mortgage payments and rental income.
Foreclosure and Bankruptcy
If you have experienced foreclosure on your home, it can take a long time to recover your finances. Lenders usually require a waiting period before you can apply for a new loan after a foreclosure, bankruptcy, or a short sale.
With a VA loan, the borrower’s entitlement needs to be considered, along with the waiting period and time to recover their credit. If there has been a foreclosure or short sale, some of the veteran’s eligibility will be gone. This will still likely mean some VA entitlement remains and can be used to qualify for another loan.
If a home is foreclosed, a quarter of the loan amount is the VA entitlement that will have been used up. The remaining entitlement can be multiplied by four to show how much is available to qualify for a second VA loan.
While a down payment isn’t always required with a VA loan, having one anyway can help with a second entitlement loan. The remaining entitlement might not be enough to purchase the home you want to buy, but you can pay the difference as a down payment. This will allow the right home to be purchased and still benefit from lower interest rates and the other advantages of VA loans.
Final Thoughts on Niche Programs Available
If your situation makes a traditional mortgage less attractive, there could be other options that better suit your requirements. These niche products could make buying more realistic and with better terms on the loan.
Buying a home is the biggest financial commitment most people make, so you should explore all your options before selecting a loan program. You might find one of these niche programs better meets your needs than more popular options.
About the author: This article was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generate new leads from his website.
We provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.