Creative Financing: How to Buy a House When You Don't Qualify for a Traditional Mortgage

Even if you're pretty sure that banks won't approve you, it's always smart to talk to someone in-the-know. Traditional loans tend to have lower interest than creative financing solutions.Your financial situation may be better than expected or you may qualify for a non-conforming mortgage from a regular lender.


If you can take out a low-interest loan from a bank, go for it!

Most lenders now require a 20% down payment. If your biggest problem is getting these funds together, an FHA mortgage may be for you. The Federal Housing Administration insures loans to help Americans get into homes with a down payment as low as 3.5%. These loans are created by regular lenders, so just about any major bank or mortgage broker can help you. Some FHA loans will even give you a special escrow account to repair or remodel your new home!

You can learn more about the process of taking out an FHA loan here: FHA Mortgage Guide.

If you can't qualify for an FHA mortgage, the second best creative financing strategy is to find a seller willing to finance the loan. A growing number of desperate homeowners are now offering seller financing, often with good terms. There are no mandatory requirements for taking out a seller financing deal. Most sellers are willing to look past credit mistakes and self-employment issues. You may be able to find someone desperate enough to let you just take over their payments. Or, you may find a seller who's open to giving you a competitive interest rate and generous terms.


Some of the most popular types of seller financing include: seller carry back mortgages, wrap-around mortgages, and assumable mortgages.


It's important to know what you're doing when taking out a seller financed mortgage. Many loans cannot be assumed without approval from a bank. If the seller tries to have you takeover payments without authorization, the bank could call the loan due and you'd need to pay the entire loan amount immediately to stay in the house. Yikes!

You can learn more about how to find legit seller financing deals here: Seller Financing Guide.

A hard money loan is a mortgage funded by individual investors / groups instead of major lenders. These people are willing to put up the money in return for charging a rather high interest rate (sometimes a whopping 12%). This is usually thought of as a short-term solution, and most hard money borrowers refinance within a few years. Hard money loans always require a sizable down payment. However, if you can bring the cash to the closing table, you can almost always qualify. Even if you have horrible credit, bankruptcies, or foreclosures, hard money investors are willing to help.

For more information about the somewhat confusing process of taking out a hard money loan, see: Hard Money Mortgage Guide.

If none of the above creative financing solutions work for you, it may be time to consider peer-to-peer lending. That's a fancy way of saying: you borrow from rich people you know. If you have a family member or friend who is especially generous and willing to help out, you can set up a traditional mortgage with him.


A growing number of loan servicing companies such as Virgin Money can help you make the mortgage official. They'll create the paperwork you need, set up escrow accounts, and let you know how much to pay every month.


For more information on setting up a peer-to-peer loan, see: Peer-to-Peer Mortgage Guide.

While seeking creative financing, be aware that many people are looking to scam desperate borrowers. If someone approaches you with a deal that seems fishy, move on or consult with an attorney before making any commitments.