Generally, when you finance a home you’ll do so through a bank; this is called a mortgage. A mortgage is just a type of loan. It generally involves you (the buyer) paying a certain amount of the home’s value as a downpayment. The remainder of the home’s value would be mortgaged by the bank; after combining that principle with whatever interest rate they grant you, they will arrive at a monthly mortgage rate that you will have to pay for somewhere between 15 and 30 years, in either a fixed or variable rate format. (Fixed rate doesn’t shift over time, a variable rate may).
This is the way home finance has operated for years, but we are in the 21st century, so, unsurprisingly, there are other new options. These options are generally referred to as alternative lending. You may be wondering what exactly an alternative lender is. It is pretty straightforward. Alternative lenders are entities that are not affiliated with any bank, yet still, they offer home loans. The big lure of alternative lenders is their potential to offer certain unique loan terms that banks are simply not allowed to offer.
Examples of this can include quick (and online) application processes, and a variety of unique terms for the loan, including costs, term lengths, what can and can’t be used as collateral, as well as extreme flexibility in the amount of the loan.
Types of Alternative Lenders: Direct and Indirect.
Credit unions are an alternative and direct form of lending. This means that they originate and grant the loan. While they offer similar loan structures and options as banks do, credit unions have markedly fewer fees and largely better interest rates than most banks can compete with. Credit unions operate on a membership basis, and so have their own specific member-requirements. So just do your research before joining a credit union.
There is also the recent advent of online lenders. The big name in this area that most people might have probably heard of at some point, is Quicken Loan, by Rocket Mortgage. A big benefit of online lenders is that the application is easy to complete, as you can submit all necessary documentation digitally, plus, your application is processed much faster than a bank would process it, resulting in less time spent anxiously awaiting an answer. Online lenders also allow loan customization (term length and monthly payment) and often provide fewer fees and better interest rates. The downside of going all-digital is that, if you run into any issues that require a human hand to fix, you might find it frustratingly difficult to get in touch with someone who is not a robot.
There are also indirect lenders to consider. These services are third-party services that serve to match people with lenders who best fit their needs.
Companies like LoanDepot and LendTree act as Lending Marketplaces; they take some basic information about your financial situation as well as what you are looking for in a mortgage, then they show you a variety of both national and international lenders, allowing you to compare companies in order to find your best option.
Loan Brokers, like loan marketplaces, also act as the middle man using their industry knowledge to help you find the loan that best fits your needs.
The single biggest thing to be on the lookout for when working with loan brokers or marketplaces is scams or unscrupulous companies. This is especially true if you’re working with an online lender, and if it is not one of those big and popular names (like Quicken Loans), you’re going to want to make sure that the lender is legitimate before getting into a contractual agreement with them. Besides verifying that the lender is legit with the appropriate regulatory body, you should do your best to become as well-versed as possible in the realm of the mortgage process.
In this regard, working with a real estate lawyer could be hugely beneficial in preventing you from doing business with a scam company, or a company that knowingly incorporates unfair and predatory terms into its contracts. Such a professional will very know what to be on the lookout for as it concerns any contract that you will sign that may otherwise not be in your best interest.
Traditional vs Alternative Lending Options. Which Option Should You Go With?
As is the case with many things and situations in life, the best answer to the question posed above is that it depends. It depends on a range of things such as what your specific goal or situation is, as well as which option is available to you. For instance, a low credit score might exclude you from being able to secure finance from traditional financial institutions, whereas an alternative lender might be willing to provide you with financing with a low credit score.
Whatever the case may be, and whatever financing option may be available to you, the most important thing that you can and should do before you accept any deal is to ensure that you are 100% certain that the terms of the deal are favorable to you. To this end, the most advisable thing to do is to ensure that whatever contract you are presented with is scrutinized by a contract attorney to ensure that there are no predatory terms that could potentially end up being detrimental to you.
As the popular saying goes, if a deal is too good to be true, chances are that it truly is. This is why you should not be so quick to accept a home finance loan from either a traditional or an alternative lender.
In conclusion, and as implied by this article, only you can make a determination whether alternative home finance is a good option to consider in financing your home or property purchase. Of course, several factors should jointly come into play in helping you make that determination. Factors like your specific goals and situation, the confidence you have in your ability to abide by the terms of the loan, and the absence of terms that may ultimately be detrimental to you.
About the Author
Seth K. Bell is an established legal practitioner with over twenty
years of experience representing clients throughout...Read More