4 Non-Traditional Ways to Finance a Home

A 30- or 15-year, fixed-rate mortgage with the same payment amounts each month is one of the most common ways to buy a home—but not everyone can qualify for a traditional mortgage, or has the money set aside for a sizable down payment so they can get a low-interest loan and have affordable payments.

Here are four non-traditional ways to be able to afford to buy a home:

1. Borrow from your parentsIf you don’t mind possibly changing your relationship with your parents, ask them for a loan to help you come up with a bigger down payment so you can qualify for a loan. Hire a lawyer to write up a contract, and make sure the loan doesn’t appear as a gift, which would require a gift tax to be paid.

2. Parental co-signers: If your parents won’t loan you money, ask them to co-sign your home loan. This can improve your debt-to-income ratio, making you a better risk to the lender—but your parents should be aware that if you don’t make loan payments, they’ll be liable for them.

3. Borrow from a retirement accountIf you have enough money in your 401(k) or IRA, you can borrow money from yourself if you use the money for a down payment on a house, or, you could use the retirement funds to show a lender that you have a lot of money in savings to make loan payments if you lose your job.

The downside is that if you’re 59-1/2 years old or younger and withdraw any of your retirement savings, you’ll pay a 10 percent penalty and will pay taxes on it. The money will have to be repaid within 60 days if you lose your job.

A Roth IRA is after-tax money, so withdrawing from it to buy a home means you’ll only be taxed on the earnings, not the full amount.

4. Insurance policy with cash valueSome life insurance policies allow policyholders to borrow against the principal or cash value, and the money can be used for whatever they wish, including a home purchase. The loan won’t have to be repaid—although not repaying it will leave a lower death benefit.

Whichever non-traditional strategy you use to finance a home, talk to your financial advisor and tax preparer for details on how it will affect your finances.

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