“Is it really possible to buy a house for nothingdown?”
That is the question I was asked by a “twenty-something”young lady at a cocktail party I recently attended.
My reply was, “Absolutely, yes.” But then Iquickly qualified that statement by adding she needs good income and goodcredit. Her husband, standing nearby, perked up at that point and suddenlybecame very interested in the conversation.
Purchase Bob Bruss reports online.
Then I regaled them with brief stories of how I bought mypersonal residence and several rental houses for nothing down. I hope Iinspired them to move out of their expensive luxury city apartment and buy theirfirst home.
As I left that conversation, my parting words were,”Your first home won’t be your ultimate dream home. But it will be a starttoward eventually buying your perfect home.”
Personally, the first “nothing down” residence Ibought was a modest two-bedroom house, which, looking back, I would nowclassify as a “major fixer-upper.” It was far from perfect, but itwas a start.
WHAT DOES “NOTHING DOWN” MEAN?
The simple definition is “zero cash from your pocket tobuy your home.” However, that definition does not mean the home sellerwon’t receive cash from the sale. In fact, the seller often receives 100percent cash in a nothing-down home purchase.
If you have good income and good credit, mortgage lendersare thrilled to loan you 100 percent of your home’s purchase price. But itwon’t be cheap!
Lenders usually charge a slightly above-market interest ratefor zero-down-payment mortgages. In addition, they require PMI (privatemortgage insurance), which requires a monthly premium to protect the lender’stop 20 percent, or riskiest part, of the mortgage. PMI premiums are notinexpensive, so be prepared.
If you are a bit short of cash, the nation’s largestsecondary mortgage market home loan lenders, Fannie Mae and Freddie Mac, willeven loan up to 103 percent of your home’s purchase price to help pay theclosing costs.
Just to be sure you can qualify for a 100 percent home loan,it’s smart to shop for a mortgage before you shop for a house or condo. Thenyou can receive a written pre-approval from an actual mortgage lender (not justpre-qualification, which means nothing) so you will know your maximum mortgageamount.
WHY SMART HOME BUYERS PURCHASE FOR LITTLE OR NO CASH. Thereare two major reasons for buying a house or condo for little or no cash:
1.) YOU DON’T HAVE THE DOWN PAYMENT CASH.
Just because you are “cash challenged” is noreason not to buy a house or condo. Even if you have lots of cash, why tie itup in your residence? There are many ways to buy a home for zero cash.
2.) YOU ARE A VERY SMART HOME BUYER WHO UNDERSTANDS LEVERAGEBENEFITS.
The second major reason for buying a home with little or nocash is to maximize your leverage benefits.
To illustrate, suppose you buy a $300,000 house for $300,000cash and that house appreciates in market value at the historic nationwideaverage rate of 5 percent annually. In 12 months, it will be worth $315,000, ora 5 percent yield on your investment.
Instead, suppose you obtained a $300,000 zero-down-paymentmortgage and the house rose 5 percent in market value in the next 12 months.Yes, you had to pay monthly mortgage payments, roughly the equivalent of rent.But now you “earned” $15,000 on zero investment for an infiniteyield.
CREATIVE WAYS TO BUY FOR ZERO CASH DOWN PAYMENT.
Presuming you want to buy your next house or condo forlittle or no cash, there are many ways to do so. The most obvious is to obtaina 100 percent or greater new mortgage. But this method requires good income andgood credit, and it can be expensive.
Instead, suppose you don’t need 100 percent financing, butyou don’t want to tie up a bundle of down-payment cash. The first step is toget pre-approved with a mortgage lender for the maximum mortgage you canobtain. Be sure this approval is in writing from the actual lender, not aworthless “pre-qualification letter” from a mortgage broker.
The second step is to use that written lender’s mortgagepre-approval to buy the home you want. If you keep the mortgage balance below80 percent of the home purchase price, you have many alternatives:
One is the 80-10-10 plan where you obtain an 80 percentfirst mortgage, a 10 percent second mortgage, and pay a 10 percent cash downpayment.
Another is 80-15-5 where you pay only 5 percent cash downpayment and either the seller carries back a 15 percent second mortgage or thelender arranges a 15 percent second mortgage home equity loan. Either way, youreceive maximum leverage benefits, buy your home for practically nothing down,and avoid costly PMI premiums.
FINANCE FIRST, THEN BUY YOUR HOME FOR LITTLE OR NO CASH.
After pre-arranging your home mortgage, and getting awritten pre-approval letter or certificate from the actual lender, it’s time tostart shopping for a house or condo. However, in the back of your mind, be sureto consider how much home you can afford.
Armed with the confidence of a written pre-approval letterfrom a mortgage lender, you can decide what zero- or low-down-payment choiceyou prefer. When you see the home you want to buy, this is no time for the”paralysis of analysis.”
With the help of your experienced buyer’s agent, make yourpurchase offer before another buyer steals your home. However, be sure yourpurchase offer contains two key contingency clauses for 1) a satisfactoryappraisal of the home, as required by your mortgage approval letter, and 2) aprofessional home inspection.
Unless you got carried away and offered too much for thehouse or condo, the appraisal contingency should not be a problem. However, thehome inspection is vital. Be sure to accompany your inspector to be certainthere are no latent or surprise home defects discovered.
If your inspector discovers a serious undisclosed homedefect, then you can either negotiate for a “repair credit” towardyour purchase price or cancel the sale and obtain a refund of your earnestmoney deposit if the seller refuses to be reasonable. More details are in myspecial report, “Secrets of Buying Your Home or Investment Property forNothing Down,” available for $5 from Robert Bruss, 251 Park Road,Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internetdelivery at www.BobBruss.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News