3. Call on your Uncle Sam: The federal government actively promotes homeownership, often extending financing to people who don't qualify for traditional bank loans. Such programs generally don't serve investors. For buyers who intend to move into the home, however, government-sponsored options abound.
The Federal Housing Administration runs the largest program -- offering mortgage insurance to cover loans up to a fixed amount (previously set at $417,000, but recently raised to $730,000 in some areas under the 2008 federal economic stimulus package). "The beauty of FHA is because we are protecting the lender from risk of loss, the lender is able to make loans to borrowers with riskier credit profiles," says Meg Burns, director of the FHA's Office of Single Family Program Development. Burns estimates that three-fourths of FHA borrowers are first-time homebuyers.
Other federal programs include:
- The Veterans Administration Home Loan Program, which provides mortgages to veterans
- The Department of Housing and Urban Development's Teacher Next Door Program, which helps teachers buy homes
- The Department of Agriculture's Rural Development Housing & Community Facilities Program, which extends financing to low-income buyers in rural areas.
4. Try an alternative lender: If securing a down payment is your primary obstacle to buying a home, an alternative lender can be a worthwhile option. That is, if you can stomach the rates and repayment schedules.
So called "hard money" lenders -- who provide financing at above-market rates to needy borrowers -- can provide cash when banks won't. They're not always easy to locate, however. Borrowers can try calling mortgage brokers and asking for referrals to these lenders, or look for their ads in newspapers or other publications with real estate listings. Also, hard money lenders are best used sparingly. Even a bargain property, when financed at above-market rates, can quickly turn into a burden.
Another fast-growing alternative source of funding is the so-called "peer-to-peer" loan market. Prosper.com, which operates a Web site through which people borrow from and lend to one another, provides loans at rates that CEO Chris Larsen says are typically 3 percent to 5 percent below what credit card companies would charge.