Mortgage Alternatives: Buying a House Without a Mortgage | Mortgages and Advice

Taking out a mortgage can be an obstacle for aspiring homeowners. You’re committing to a long-term loan while racking up hundreds of thousands of dollars’ worth of debt, which is especially daunting when mortgage rates are high. But unless you have enough savings to cover your purchase in cash, there are few options for buying a house without a mortgage.

In this guide, we’ll review some lesser-known mortgage alternatives, like rent-to-own and seller financing agreements, as well as the pros and cons of buying a house in cash.

You may have heard that rent-to-own financing is a way for the buyer to work toward homeownership through rent payments, which is a fairly accurate – if oversimplified – explanation of the process. The details vary depending on the type of rent-to-own agreement: lease option or lease purchase.

With a lease option, the renter is given the option to purchase the home once the lease expires, paying a portion of the rent toward the future down payment. The renter pays an upfront option fee that may be forfeited if they don’t end up buying the home.

On the other hand, a lease purchase means the renter must sign a purchase agreement that’s a committed contract to buy the property at the end of the lease. A lease purchase rent-to-own agreement leaves less wiggle room if the renter later decides they don’t want to buy the home.

Keep in mind that rent-to-own agreements are legally binding and the consumer protection laws vary from one state to the next. Additionally, not all rent-to-own contracts are created equal; a program through a state housing agency could be beneficial, but a murky contract from an unregulated company could be predatory.

When it comes to whether or not rent-to-own is a good idea, the answer really depends on the terms of the deal and who’s overseeing it. In any case, it’s best to consult with a real estate attorney before signing on the dotted line.

Another nontraditional homebuying venue is seller financing, sometimes referred to as owner financing. With this agreement, the seller is essentially the lender, working with the buyer to finance the purchase of the home.

One common type of seller financing is a land contract, otherwise known as a contract for deed. The seller retains ownership of the legal title, and the buyer makes regular payments directly to the seller. When the buyer meets the terms of the loan – sometimes with a balloon payment at the end of the contract – they receive the title and ownership of the home.

Land contracts are usually much shorter than a traditional 15- or 30-year mortgage, with the repayment period often just five years or less. With the help of a qualified real estate attorney, the buyer and seller agree to the repayment terms of the contract, including the interest rate and payments.

As you can see, the cons will very likely outweigh the pros if you decide on buying a home through seller financing. There may be a few instances where this could work – like if you already have a close relationship with the seller – but it’s considered risky even if the stars do align.

The most obvious (and probably least helpful) alternative to borrowing a mortgage is to buy a house with the money you have. About a third of homebuyers throughout most of 2023 paid in cash, according to the real estate brokerage Redfin.

Those who can afford to buy a house in cash have an edge, whether they’ve acquired that cash by selling their previous home or through years of meticulous penny pinching. But even buyers who have enough saved up to cover the purchase price may still decide to borrow a mortgage so they can invest that cash or save it for retirement.

There are few drawbacks to buying a home in cash – other than the obvious hurdle that many people just don’t have that sort of money. Be wary of tying up all of your life savings in a house, but generally, paying in cash is a wonderful privilege for those who can afford it.

According to a Bloomberg analysis of U.S. Census Bureau data, nearly 40% of homeowners own their homes outright – in other words, without a mortgage. But for most Americans, mortgages are synonymous with homeownership, and that’s not necessarily a bad thing.

A mortgage enables you to build equity through stable monthly payments at a relatively low interest rate. The mortgage industry is heavily regulated, so a home loan is a sound financial tool compared with alternative financing options like land contracts.

If needing a mortgage is preventing you from owning a home, get in touch with your state and local housing agencies to see if you’re eligible for programs that can provide a pathway to homeownership. These may include down payment assistance grants, first-time homebuyer loans and even rent-to-own agreements.

Common sense prevails when it comes to alternative home financing: If something sounds too good to be true, it usually is.