How To Buy A Home With Little or No Money Down!

What if I told you that you did not need to go through a bank or S&L to obtain a new mortgage? What if I told you that you did not need excellent credit; that you did not need to pay an application fee or loan origination fee to secure financing? What if I told you that you could buy a home with little or no money down? No, I'm not hawking a late night commercial on real estate. I'm talking about a very powerful financing tool that, once understood, can change your entire view of property acquisition.

One of the least understood tools of residential real estate financing is what I call "creative financing." How sad! I have found that knowledge of this non-traditional financing vehicle can afford many individuals the opportunity to own real estate either for investment purposes or for personal occupancy with little if any money down. In many cases, the buyer's credit rating is of no consideration to the transaction at hand and income stability (a continual source of irritation for self-employeds) is often times not the factor.

Unfortunately, the number of bankers or realtors who are versed in the specialized area of creative financing is quite limited. Nonetheless, opportunities do abound and, if you astute and - I might add - patient, you can find them.

Statistics have shown that no other investment has made more money for a wider segment of the American people than the investment of owning real estate.

As America continues to "re-engineer" its corporations and companies continue to downsize, more and more opportunities will emerge for purchasing properties from what, I will term, distressed sellers. To the extent that you are knowledgeable of these techniques and the leveraging power of "Other People's Money", the greater your prospects of financial reward in the real estate industry.

Simply stated, creative financing is any form of non-institutional financing provided primarily by the seller, builder or the investor. This type of financing is less rigid and more flexible than the traditional forms of financing offered by a bank or lending institution. Some examples of this type of financing are lease-purchase agreements, land contracts (also referred to as "contract for deed" and "contract for sale"), owner-financed first mortgages, owner-held second mortgages, wrap-around mortgages and non-qualifying assumptions. As a general rule, the best opportunities for buying a home with a small amount (or no) cash are:

1. vacant houses 2. homes being sold by highly-motivated listing agents 3. sellers who don't need a large amount of cash from the sale

Also, many retirees will carry back a mortgage for extra retirement income. There are many advantages to creative financing, the most obvious being that it gives a potential buyer the most incentive to purchase the property. Many times the seller or builder will finance the property at rates and under terms that are far superior than those offered by banks. In addition, the seller, builder or investor is not required to use the same loan qualification system that institutional lenders use. In fact, the only qualification guideline that they are required to use is their own judgment! Therefore, the potential buyer does not have to "qualify" for financing using the traditional yardsticks of credit, employment, income and indebtedness. This is a major selling point.

In addition, the large closing costs typically charged by lenders can be eliminated. Realtor commissions are seldom involved in many of these sales transactions. Finally, the loan closing itself, which can normally take weeks or months can be accomplished in days. Having said this, let me begin by discussing the various options available to purchase a home with little or no money down.

One caveat: There is no such thing as a "perfect" home in the real estate business. What you are looking for are terms that are "perfect" for you. If a seller is not interested in helping consummate the deal, you have no deal. Don't get frustrated, move on. There are many houses on the market where sellers are willing to negotiate.

GOVERNMENT HOME LOAN PROGRAMS

VA Purchase

Today, it is possible for a veteran to obtain "no downpayment" financing for upto $203,000. Additionally, under recently liberated VA policies, reservists and National Guardsmen who have completed six years of satisfactory duty are also eligible. Credit guidelines are considerably more liberal that traditional standards and with seller contributions up to 4%, it is entirely possible for a veteran to close the loan with no out-of-pocket costs.

VA No Qualifying Assumptions: The Veterans Administration has always allowed VA loans to be assumed. The date that the VA mortgage went into existence is the date that determines the assumption rules. On virtually all VA loans made prior to March 1, 1988, the new buyer can assume the mortgage with no qualifications whatsoever. This includes veterans, non-veterans, investors, relatives, real estate agents or whomever. No credit report is required, no employment verifications, no appraisal or survey. Unbelievable but true!

This type of loan can close within 48 hours from the signing of the contract. A simple assumption fee of $50.00 is all that is required along with optional title insurance. After March1, 1988, the Veterans Administration began requiring the potential buyer assuming the VA loan to qualify. However, these properties are eligible for sale under lease purchase, land contract or installment sale by the veteran without qualifying the buyer.

Title would not transfer under this scenario and the veteran would still be liable for repayment of the loan. One special note: In circumstances where the veteran is unable to continue making mortgage payments, the VA, at its discretion, may waive loan qualifications to a willing buyer on the assumption. This is certainly a better scenario than foreclosure!

FHA No Qualifying Assumptions: The Federal Housing Administration has always allowed FHA loans to be assumed but here again, as with VA loans, the date that the FHA mortgage comes into existence is key. Virtually all FHA loans made before December 1, 1986 can be assumed without qualifications, hence their attractiveness for real estate investors. Assumptions costs can not exceed $125.00.

After December 1, 1986 a seller has two options in selling a FHA loan under assumption. He may sell the house with no buyer qualifications required to close quickly. However, the seller remains liable for repayment of the FHA loan with the assumptor contingently liable for repayment. Secondly, the seller can require the assumptor to qualify and obtain a release of liability from the FHA. Under this scenario, the assumptor must go through the complete qualifying process which can take up to six weeks or more.

FORECLOSURE or DISTRESSED PROPERTIES

Property discounts can be found by purchasing properties after foreclosure. I would like to emphasize AFTER foreclosure because real estate, having gone through sheriff's sale, is now in the hands of the foreclosing lender who has acquired title (called REO - real estate owned) who is usually anxious to get rid of these properties. After all, banks are not in the real estate business!

Normally, discounts to market value are around 23% and if you have good credit and a stable income, you can negotiate with the bank for terms that are more suitable for you. Smaller banks tend to be more flexible on terms. In many cases, you will be referred to a realtor who is handling the subject property. Depending upon the property and its condition, you may be able to negotiate suitable terms. By all means, be direct and state your requirements before becoming involved in transactions of this type.

If you are attempting to purchase a property from the original owner (mortgagor) under favorable terms, exercise with extreme caution. Without a clear knowledge of distressed property, you could find yourself stuck with liens, overpriced property and compromised collateral. Of course, buying property at sheriff's sale is unrealistic without cash on the spot - which is not what you want to do.

SELLER FINANCING

This approach can be simplified by looking at conveyance of title. Under a "Land Contract", the seller provides financing to the buyer under terms and conditions mutually agreed upon but the seller does not relinquish title to the property. Many times, no downpayment is required and monthly payments are made directly to the seller. The downside of this is that the seller can encumber the property (remember, he still retains title) and, importantly, if the property is already secured by a mortgage with a "due on sale" clause by the lender, if this transaction becomes known to the lender, the loan is accelerated and immediately payable in full. Because of this, many land contracts are not recorded to "protect the buyer" from the acceleration clause. Seek legal counsel before pursuing any land contract.

Under "owner-financing", the seller, in fact, becomes his own mortgage bank by providing a mortgage and transferring title to the new owner. Again, terms are negotiated. This technique is often found where the seller owns the property free and clear (or a low balance) or interest rates are high, with the seller providing a lower, more tantalizing, rate.

Similarly, seller-seconds (seen frequently with builders) involve buyers who do not have sufficient downpayment to meet lender loan-to-value requirements. The seller will make a loan to the buyer as a part of the financing and secure his interest with a second lien on the property. Thus, the buyer will repay the seller along with the lender, in effect carrying two mortgages, a first mortgage and a second mortgage. While many traditional lenders will not permit this type of seller involvement, there are nontraditional lenders who will. Do your homework!

LEASE WITH OPTION

Under this scenario, buyer signs a lease and a sales contract simultaneously. An option to purchase the property at an agreed upon price by a specified date is executed. An "option" fee, paid by the buyer represents his guarantee that the purchase will be consummated on or before the expiration date of the contract. Typically, if this does not occur, the option fee is forfeited and the Sales Contract becomes void.

It is important to recognize that while this has the appearance of a purchase, it is not. The buyer is leasing the property monthly - not purchasing it. Some sellers apply a rent "credit" toward the purchase price - charging a monthly rent surcharge. The advantage of this program is that it locks in a purchase price - which if you have negotiated effectively - can be significantly lower than market value.

This strategy gives you automatic equity at the time you actually purchase the property. Several downsides to this approach are:

1. if you are unsuccessful in obtaining permanent financing prior to the expiration of the sales contract thus forfeiting the option fee; and 2. entering into a purchase agreement without a proper appraisal validating the market value of the property under consideration.

Here again, before signing anything consult a real estate attorney.

While this discussion is not all inclusive, these techniques should provide you with the incentive to take a closer look at "creative financing". Remember, it's never too late to start!

Copyright © 2007 O'Hara Enterprises

About the Author

Frank O'Hara is a freelance business writer, author, publisher, webmaster and real estate investor. You can obtain additional real estate know-how and much more at his website - http://infomaniamall.tripod.com