Are you old enough to remember Robert G. Allen’s bestsellerreal estate book “Nothing Down” from the early 1980s?
I’m showing my age, but I vividly remember that book becausea) it explained dozens of creative real estate finance methods, and b) Iactually used several of those techniques to buy profitable property fornothing down.
Purchase Bob Bruss reports online.
Most of those methods are still viable. But for the majorityof today’s home purchases, there is no longer a need to use creative sellerfinancing and other innovative methods.
Today’s mortgage lenders have become very savvy about theprofitability of making low- and no-down-payment home loans, even to borrowerswith poor credit. Last year, according to the National Association of Realtors,over 30 percent of home sales involved 100 percent financing in one form oranother.
THE DEFINITION OF “NOTHING DOWN.”
In real estate “nothing down” means zero cash fromthe buyer’s pocket. However, it doesn’t mean the seller won’t receive 100percent cash for the home. Personally, I bought several zero-down-paymenthouses where the sellers walked away with all-cash.
Nothing down really means the buyer is borrowing the entirepurchase price.
To illustrate, when you read in the newspaper that acommercial property sold for $50 million, do you think the buyer paid $50million cash from his savings account? Of course not. Using a combination of afirst mortgage, perhaps a second mortgage, plus a bank credit line, theinvestor-buyer probably didn’t even pay the closing costs from his pocket. Thesame procedures apply to home purchases.
BUYING A HOME FOR NOTHING DOWN IS EASY.
If you are in the market to buy your personal residence, butyou are a little “cash-challenged,” don’t let that stop you frompurchasing for zero cash from your pocket, just like the real estate tycoons.
Although not every mortgage lender offers zero-down-paymentmortgages, a savvy mortgage broker can arrange your no-cash home purchase.Especially if you are a first-time home buyer (defined as not owning a house orcondo within the last two years), most mortgage lenders offer extra-easy homefinance plans.
But there’s a catch. You will need 1) a reliable source ofincome, and 2) a good credit score. Many lenders now offer “statedincome” mortgages where, with good credit, you don’t even have to proveyour income, such as with W-2s or tax returns.
If you qualify, and many home buyers can, lenders willgladly finance 100 percent, sometimes even up to 125 percent, of your purchaseprice. But you will probably pay an above-market interest rate, often includingPMI (private mortgage insurance) premiums. In other words, “nothingdown” isn’t cheap.
HOW TO DETERMINE IF YOU ARE A “WELL-QUALIFIEDBUYER.”
If you pay attention to those “no cash required”radio and newspaper ads for some new houses and condos, in the disclaimer youwill usually spot the words “well-qualified buyer.” That means youmust have good income and good credit.
To check your credit reports from all three national creditbureaus, and determine your FICO (Fair Isaac Corporation) score which mostlenders use to rate you as a “well-qualified buyer,” just go to
For $44.85 total, you will receive your three creditreports, and your FICO credit score. Each credit report will be different, sotake time to compare them and follow the instructions to correct any errors.
Or, at no cost, you can obtain all three of your creditreports at 1-877-322-8228 or www.annualcreditreport.com.However, you will not receive your very important FICO score at this freesource.
After checking your credit reports and FICO score, the nextstep is to get written pre-approval for a no-down-payment mortgage. Most majormortgage lenders offer this service, or a mortgage broker can obtain a lender’spre-approval written mortgage commitment at a low or zero up-front cost. Toobtain a zero-down-payment mortgage, most lenders require a FICO score of atleast 680.
Armed with your lender’s written pre-approval mortgagepromise (subject to reasonable conditions, such as appraisal of the home youdecide to buy), then you can shop with confidence knowing the maximum mortgageyou can obtain.
But don’t settle for a lender’s worthless”pre-qualification” letter, which just means, “We think you canqualify for a mortgage but we really haven’t checked you out yet.”
HOW TO BUY A HOME WITH 100 PERCENT FINANCING.
However, if you can’t qualify for a no-down-paymentmortgage, don’t give up. There are many alternatives. For example, many buyers’real estate agents recommend 80-20, 80-10-10, or 80-15-5 mortgage choices. The80 means the lender makes an 80 percent first mortgage, and a 20, 10, or 15percent second mortgage, often in the form of a home equity loan.
If you can make a 5 to 10 percent cash down payment, thatmakes obtaining financing even easier. A special advantage of keeping the firstmortgage at 80 percent or less of the home purchase price is you will avoid thedreaded PMI (private mortgage insurance) premiums.
However, in the right circumstances, “sellerfinancing” might be your best and least expensive choice.
Large real estate fortunes have been earned with thismethod. For example, real estate tycoon, John Schaub, reports in his recentbestseller book, “Building Wealth One House at a Time,” he neverobtains bank mortgages when buying.
Another example is small-town realty mogul, Jay DeCima, whoexplains in his best selling, “Start Small, Profit Big in RealEstate,” book why he buys ugly run-down houses, which no mortgage lender,except the seller, will finance.
LEVERAGE ADVANTAGES OF NOTHING DOWN.
Another name for buying real estate with little or no cashis “high leverage.” It simply means the borrower controls the entireproperty with a small amount of cash.
The big leverage benefit is usually a high percentageprofit-per-dollar invested if the property goes up in market value due tocapital improvements or sales price appreciation.
For example, suppose you buy a house or condo for $200,000with nothing down. Because of your good income and good credit, the mortgagelender approves a $200,000 mortgage. Suppose that house appreciates in marketvalue by 5 percent annually, or $10,000 in the next 12 months. What percentagereturn is that on your investment? The correct answer is “infinite,”because your only out-of-pocket expense was probably for closing costs.
However, suppose instead you paid $200,000 cash for thatsame home and it appreciates the same 5 percent in market value ($10,000)during the next 12 months. Now your return on investment is a mere 5 percent.Of course, you avoided the tax-deductible mortgage payments, so those savingsshould be added to your return.
As the years go by, the advantages of high leverage on yourhome usually become greater each year. Of course, there is also risk,especially if you have to sell the home within the first five or 10 years whenyou don’t have much equity.
SUMMARY: There are many advantages, and a few disadvantages,of buying a home for nothing down. But the pros usually outweigh the cons.However, as Allen often said in his “Nothing Down” lectures,”Buying real estate for nothing down is easy; the hard part is making themonthly payments.”
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News