What Happens When the Bank Says “No” to the Mortgage for Your First Home?
From real estate agents, to loan officers, to the deluge of data found on the Internet, there’s plenty of advice out there for first-time home buyers looking for their first mortgage. It can be intimidating and confusing to figure out what documents you need like how many pay check stubs you’ll need, how many W2 forms are required, and the bank statements you need to submit.
But what happens if after all of that, you just simply don’t qualify for a mortgage. Do you just sit back and wait for things to change? Maybe wait until you’ve had more time on your job, money in the bank, or your credit score improves?
If you’re turned down for your mortgage, there are options out there that will help you buy your first home.
Find a Private Lender
Private lenders can be an individual or a group who place short-term loans on real estate and cater to the market of those who can’t quite qualify for a traditional mortgage loan. The individual investors and private lenders will finance real estate that a bank would not in exchange for a higher interest rate than you would find in stocks, bonds, or mutual funds.
Private loans are typically shorter term in nature, giving you time to correct what is holding you back from a conventional mortgage. Private loans can require down payments of 20 percent or more, depending upon the guidelines of a particular private lender.
Specialty private lenders can also concentrate their resources on particular types of real estate, such as rental income properties or vacation homes, for example.
Consider Hard Money Lenders
A hard money loan is a form of private money and is more expensive yet more lenient. While your lender will still pull your credit report, it’s less of a concern for them. Hard money loans rarely have minimum credit score requirements.
A common scenario for a hard money loan is a property that you can’t finance with a conventional loan because of the home’s condition. In that case, you’d take out a hard money loan to buy and fix up the property.
Once the renovations are complete, you would refinance into a traditional mortgage or sells the property outright. If you choose a hard money loan you’ll need a larger down payment—usually at least 50%--compared to other types of financing. You’ll also pay interest rates in the double digits and more in closing costs and fees.
Work with a Community Development Financial Institution
Community Development Financial Institutions, or CDFIs, concentrate their efforts in under-served markets- markets not being served by traditional banks or where real estate in general is in some state of disrepair. The mission for a CDFI is to revitalize communities providing financial assistance to local banks or to finance a project directly. Interest rates and loan terms in general with a CDFI are more competitive than either a private or hard money lender.
For those who can’t qualify for a conventional mortgage but are still in the market for a first home, working with a CDFI can be your best option. CDFIs may not be as common as hard money or private lenders but in the right fit where financing affordable housing in urban areas is needed, there really is no better option.
Once a community is stabilized, conventional financing can options can return. First time home buyers in most areas of the country do have access to special loan programs designed specifically for their status. There may also be grants available issued to help offset closing costs or assisting with a down payment. Such first-time programs may also be more liberal as it applies to qualifying.
When you’re buying your first home, you have more options than you might think.
Jeffrey Lawrence Kirsch is a mortgage expert in the United States. He is an expert in non-performing loans and distressed mortgages as well as social impact investing. He writes about commercial and residential real estate.