No-Money Down Mortgages? Still Readily Available
Recent news about bad credit mortgages and foreclosure increases have caused many home buyers to question whether there will still be flexible loan opportunities for them if desired.
The short answer is “YES.” Buyers can still obtain 100 percent financing for real estate — in other words, buy a home with no money down.
Most flexible financing methods are still viable. But for the majority of today’s home purchases, there is no longer a need to use creative seller financing and other innovative methods.
Furthermore, for the first time in 2007, there is a new federal tax deduction allowing for private mortgage insurance (PMI) premiums. For those who close their loans this year, these premiums, which are paid by borrowers who put no or little money down, are fully tax deductible.
Today’s mortgage lenders have become savvy about the profitability of making home loans with low or no-down-payment, even to borrowers with poor credit. Last year, according to the National Association of Realtors, over 30 percent of home sales involved 100 percent financing in one form or another.
The definition of “nothing down”
In real estate “nothing down” means zero cash from the buyer’s pocket. However, it doesn’t mean the seller won’t receive 100 percent cash for the home. In fact, sellers benefit from a higher purchase price from buyera with no money mortgages down verus cash buyer.
“Nothing down really means the buyer is borrowing the entire purchase price,” said Lawrence Vecchio, home mortgage broker and the owner of BetterHomesNJ.com/VRI Realtors
“For example, when you read in the newspaper that a commercial property sold for $50 million, do you think the buyer paid $50 million cash from his savings account? Of course not. Using a combination of a first mortgage, perhaps a second mortgage, plus a bank credit line, the investor-buyer probably didn’t even pay the closing costs from his pocket. The same procedures apply to home purchases,” Vecchio said.
Buying a home for nothing down is easy
If you’re in the market to buy a personal residence but you are a little “cash-challenged,” you can purchasing for zero cash from your pocket, just like the real estate tycoons.
Although not every mortgage lender offers zero-down-payment mortgages, 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 or condo within the last two years), most mortgage lenders offer extra-easy home finance plans.
But there’s a catch. You will need a reliable source of income, and a good credit score. Many lenders now offer stated income mortgages where, with good credit, you don’t even have to prove your income, such as with W-2s or tax returns.
If you qualify, and many home buyers can, lenders will gladly finance 100 percent, sometimes even up to 125 percent, of your purchase price.
“You will probably pay an above-market [home loan rate], often including PMI (private mortgage insurance) premiums,” Vecchio warns. “In other words, “nothing down’ isn’t cheap.”
How to determine if you are a “well-qualified buyer”
If you pay attention to those “no cash required” radio and newspaper ads for some new houses and condos, in the disclaimer you will usually spot the words “well-qualified buyer.” That means you must have good income and good credit.
After checking your credit reports and FICO score, the next step is to get written pre-approval for a no-down-payment mortgage. Most major mortgage lenders offer this service, or a mortgage broker can obtain a lender’s pre-approval written mortgage commitment at a low or zero up-front cost.
To obtain a zero-down-payment mortgage, most lenders require a FICO score of at least 680.
Armed with your lender’s written preapproval mortgage promise (subject to reasonable conditions, such as appraisal of the home you decide to buy), then you can shop with confidence knowing the maximum mortgage you can obtain.
But don’t settle for a lender’s worthless “pre-qualification” letter, which just means, “We think you can qualify for a mortgage but we really haven’t checked you out yet.”
How to buy a home with 100 percent financing
Even if you can’t qualify for a no-down-payment mortgage, 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. The 80 means the lender makes an 80 percent first mortgage, and a 20 percent, 10 percent or 15 percent second mortgage, often in the form of a home equity loan.
“If you can make a 5 percent to 10 percent cash down payment, that makes obtaining financing even easier,” Vecchio notes. “A special advantage of keeping the first mortgage at 80 percent or less of the home purchase price is you will avoid the dreaded PMI premiums.”
However, Vecchio points out, in the right circumstances, “seller financing” might be your best and least expensive choice.
SOURCE: The Asbury Park Press