A mortgage loan is the most traditional, and probably the smartest way, to buy a home. You're going through a bank for a loan and the monthly payments will be the same for 30 years.
And, don't forget, the interest payments on a mortgage are deductible on your federal tax return.
But if you can't qualify for a mortgage, there are non-traditional ways to buy a home. Here are seven, though some come with caveats on when they might not be a good idea:
1 - Borrow from a retirement account
This can sound like a good, short-term idea if you have enough money in your 401(k) or IRA because you're basically borrowing money from yourself. What can be so wrong with using some retirement funds to help with a down payment or show a lender you have a lot of money in savings? If you're under 59-1/2 years old, you'll have to pay a 10 percent penalty on the withdrawal and will pay taxes on it. If you lose your job, the money has to be repaid within 60 days. But if you don't mind all of those hassles, it could be worthwhile.
"There are few, if any circumstances I'd recommend people borrow from their 401(k) to buy a house," says Tyler Gray, a financial advisor at SageOak Financial in Tulsa, OK.
Borrowing from a Roth IRA may be easier than a 401(k), and can be a good option for first-time homeowners, says Marge Peck of Discover Arizona Real Estate in Phoenix, Ariz.
"The Roth is an after-tax IRA so you can withdraw and will only be taxed on earnings," Peck says. "In a volatile housing market like we have seen lately, be sure this is a good investment. Also, talk with your financial advisor so you don't trigger any tax penalties."
2 - Borrow from your parents
Get the loan in writing by hiring a lawyer to write up a promissory note and a written contract. Consult an accountant so that the loan doesn't appear as a gift, which would subject it to the gift tax.
Again, this is a loan that Gray doesn't recommend, partly because it "completely changes the dynamic of the relationship and not usually in a good way," he says. "It's better the family member will just give you the money with no expectation to be paid back, and then when you do make payments, it will be a happy surprise."
One way to do a family loan is through National Family Mortgage, which facilitates home loans between relatives for a one-time fee of $725. The company generates the financing documents and registers the mortgage with the proper government authorities.
The monthly servicing fee is $15 for loans up to $500,000, and can go higher for larger loans. The company's loan default rate is less than 1 percent, says Timothy Burke, CEO of the business.
3 - Borrow from your insurance policy
Many whole or variable life insurance policies allow policyholders to take a loan against the principal. The good news is you won't have to repay the loan, though your heirs will end up with less money from the life insurance policy.
Borrowing against a policy that has cash value is another case of borrowing from yourself. Future premiums that you pay can go toward paying back the loan, says Liran Hirschkorn, an independent insurance agent at BestLifeQuote.com.
You can go directly through your insurer for the loan, Hirschkorn says. Rates vary greatly, and some policies may be tied to a fixed rate while others have a variable rate.
"Some lenders may lend you money based on a percentage of the cash value in the policy," he says. "However, you can probably get a more favorable rate and access more money by using your cash value and borrowing against it yourself."
"Since rates are favorable this could be a good way to fund a down payment or a home purchase," he says. "You just want to review the policy and see if the death benefit will be reduced by the cash value loan, and that you keep paying enough premiums to keep the policy in force."
4 - Get a co-signer
If you don't want to ask your parents for a loan, try getting them on as a co-signer for the loan.
Bob Gordon, a real estate agent at Re/Max Alliance in Boulder, Colo., says a couple he worked with did this not because they couldn't afford a home, but because they're in a competitive market and it made qualifying for a loan easier.
The couple had the wife's parents co-sign, which took the income to debt ratio up exceedingly high and made the buyer over qualified, Gordon says. This helped them beat out another offer on the house they wanted - but not by paying more for the house, but by being the better risk for the seller.
5 - Seller financing
The home seller is acting as the bank and would hold the mortgage while you make payments to them.
"It almost becomes a rental property," except you do the maintenance, says David Hansel, president of Alpha Funding Solutions in Lakehurst, N.J.
6 - Rent to own
This option can work for both sides if the buyer can come up with a large enough down payment to make it worthwhile for the seller, Hansel says. A certain amount of the monthly rent would go toward credit for buying the home at the end of the contract, often within a year, he says.
Or, the purchase price could be increased by $50,000, for example, to make it worthwhile to the seller, who is basically giving the buyer an interest-free loan for a year while they live in the house, Hansel says. All of the rental money for the year could then be put toward the down payment on the house.
7 - Save more for a down payment
The common 20 percent down payment that your parents, or grandparents, had to make on a home is preferable, but no longer needed by many lenders. But if you still can't come up with enough of a down payment, then save your money for a few years until you can qualify for a traditional mortgage.
Wedding registry websites such as Feather the Nest can help couples collect money for a house down payment or closing costs.
For young couples who aren't quite yet sure where they want to live long-term, Gray, the financial advisor, suggests trying to remain debt free and putting aside much of their disposable income so they can pay cash in five to seven years when they have a better idea of where they want to live.