“NO MONEY DOWN!” “100% FINANCING!” “103% FINANCING”
Buyers love seeing and hearing those words. And why wouldn’t they? First-time buyers make up 40 percent of the home buying market. This is nearly half of all homes sold.
Consider this. There were just over seven million homes sold in 2005, not including new construction homes. This means that nearly THREE MILLION buyers bought their first home last year.
Marketing to this segment, if you are a real estate agent, is an absolute must! Of these first-time homebuyers more than four out of every 10 bought this home with no money down.
On average, first-time homebuyers put down less than 2%. Around 10 years ago, the average first-time homebuyer put down a little more than 10%.
I would say that nearly seven out of every 10 loans I do has 100% financing and it’s not just first-time homebuyers. However, most potential first-time buyers don’t even realize this option is available to them and that’s why this newsletter will focus on them.
The real estate market flourished over the last few years in large part to 100% financing for first-time homebuyers. Suddenly, buying a home is possible for nearly everyone. More first-time buyers have been able to enter the marketplace than ever before. Banks have become more liberal and lending standards have loosened. There are many, many ways to get 100% financing.
You can get 100% conventional financing with credit scores as low as 620 and a fairly recent bankruptcy.
You may be able to get a government loan with an even lower credit score. 100% financing is available for nearly every borrower. You can even buy a $2,000,000 home with no money down today. That’s two MILLION, not a typo at $200,000. Amazing, but true.
Many potential first-time homebuyers never think of buying a house because they don’t believe they have enough money for the down payment.
They’ve been told through the years that they need a 10-20% down payment to buy a home. Obviously, this simply isn’t true.
Let’s look at most of the 100% financing options:
1) 100% No Down Payment Programs.
These programs require the buyer to pay ordinary closing costs. These programs come in all varieties from 2, 3, 5, 7, and 10 year adjustable rate mortgages to 30 year fixed mortgages. All are usually available as interest-only too.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
o 2.5%-3.5% of the total loan amount in cash required to pay closing costs and two month’s of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is an option with decent credit.
o Plan on having a mid credit score of at least 660 if you cannot fully disclose your income to qualify.
o If you can fully disclose your income to qualify, your mid credit score can sometimes be as low as 580.
o These loans are designed for people who have some money for closing costs. You can qualify for this with credit scores as low as 580.
This is the most popular 100% financing option on my team.
2) 100% No Down Payment and Seller Pays Your Closing Costs.
The exact same loan program as #1, with all of the same loan program options above, but with a different twist. The seller pays all of the 2.5%-3.5% in closing costs. This is the way to go if your buyer has no money at all but fairly decent credit.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
o The seller pays the 2.5%-3.5% of the total loan amount to pay closing costs.
o You are still usually required to show two month’s of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is an option with decent credit.
o Plan on having a mid-score of at least 660 if you cannot go fully disclose your income to qualify.
o 580 mid credit score is usually the minimum required on full doc loans but plan on a much higher interest rate.
o These loans are designed for people who have no money for closing costs.
Nearly every loan program out there today allows for the seller to pay your closing costs. This means no money out of your pocket.
If you don’t have the necessary reserves or you don’t have the ability to get them, it is not a big deal, and you should still be able to get the loan. However, it’s important to notify your preferred lender of this immediately as this could change the availability of the loan program and likely your interest rate.
3) 103% Loan With No Down Payment, Little or No Closing Costs.
Maybe your seller refuses to pay for closing costs and your buyer has no money to close. Then 103% loan programs may be the way to go. This means the lender finances the closing costs as well. The requirements on this program are stricter and the options fewer.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
o The lender pays the 2.5%-3.5% of the total loan amount to pay closing costs and ties this into your loan.
o You still may be required to show two month’s of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is NOT usually an option regardless of your credit.
o Plan on having a mid-score of at least 620.
o These loans are designed for people who have no money for closing costs and the seller refuses to chip in.
The interest rates on these programs are higher and the program selection is more limited. If possible, it’s a better move to go for #1 or #2.
4) VA Loans
If you are a Veteran, VA loans require no money down and the seller can pay your closing costs. The rates are very good and the credit requirements are not very high.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
o Must be a veteran in active duty, or honorably discharged.
o The seller usually pays the 2.5%-3.5% of the total loan amount to pay closing costs but the Veteran can pay too.
o Must fully disclose your income to qualify. You cannot go stated income or No Doc.
o You will not be required to show two month’s of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is NOT an option regardless of your credit.
o Plan on having mid-score of at least 560 – 580 although there is no formal guideline on this.
o These loans are designed for Veterans only.
5) FHA Loans
This isn’t really a “No Money Down” option, however many first-time homebuyers have found that the FHA loan is one of the best alternatives when they don’t have much money to put down.
With an FHA loan, you could put down as little as 3%. FHA loans are easier to qualify for. If your credit is less-than-perfect, the rates on an FHA loan are usually far better than the sub-prime alternative that you may be facing. For example, if you have a 580 mid-credit score, your options may be FHA or a sub-prime loan. FHA would probably be cheaper for you.
Now, 3% may seem like a lot to come up with, but many people find that when they put their minds to it, it’s not that difficult. FHA allows this 3% to be gifted to you by a family member, employer, or even a charitable organization.
FHA loans do have very strict requirements and restrictions. Not all town homes and condos qualify, and there is a maximum loan amount you can get. You can check the FHA website at http://www.fha.gov for the lending limits in your area.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
o You are responsible for the 2.5%-3.5% of the total loan amount to pay closing costs but the seller can pay too…all the way to 6%.
o Must fully disclose your income to qualify. You cannot go stated income or No Doc.
o You will not be required to show two month’s of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is NOT an option regardless of your credit.
o Plan on having mid-score of at least 550 – 580 although there is no guideline on this, and you may be able to qualify with a lower score.
o If you are using a non occupying co-borrower or you have a roommate, renting a room from you, whose income you would like to help you qualify; this may be the best way to go.
Many other loan programs don’t allow you to consider these sources and do 100% financing.
6) Owner Financing
Owner financing means the owner (or seller) finances all or a portion of your home purchase.
For example, you might borrow 80% of the value of a home from a mortgage bank, and “borrow” the other 20% from the owner. In this situation, the owner “carries back” a second mortgage. Or he could carry 100% of it.
For the average homebuyer, owner financing is very difficult to find and requires some tricky negotiating. In my opinion, it’s generally a bad idea.
However, if your credit score prevents you from getting a 100% loan, this may be the only way to go. If you have successfully negotiated a deal where the seller carries the mortgage, you should contact a skilled attorney to protect all parties, especially you.
Sellers don’t usually want to carry loans for 30 years like mortgage companies do so plan on your seller-financed loan having a much higher interest rate than a mortgage company can offer you.
Also, plan on having a balloon payment of some kind. Two to five years is normal. This means you will have to pay the loan in full or refinance it with a mortgage lending institution at the end of the balloon period. If the seller goes into bankruptcy or has serious personal financial troubles and loses the house, you may be out as well, including all of the money you have in the property.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
o Closing costs are usually minimal.
o No minimum credit score required…just an agreeable seller.
o No income disclosures are usually necessary.
o You will usually not be required to show two month’s of your new loan payment in the bank for reserves nor any other banking information.
o Risk is very high as you are not dealing with a trusted institutional lender.
o Plan on higher rates and unconventional terms.
You shouldn’t rule out owner financing if you have poor credit. Just keep in mind that by looking for someone who is willing to help finance your purchase, you severely limit your choices and there is a tremendous amount of risk involved. Protect yourself with strong professional advice from your real estate agent and an attorney.
9) Lease-To-Own
With the tremendous increase of homes in inventory, combined with few who can afford them because of the rapid increase in value, this option is becoming more and more popular.
With a lease-to-own, or a lease option, you lease a home, like normal, but make larger payments in order to begin accumulating a down payment. For example, if a house would normally lease for $1200, you might lease it for $1500/month, with $300/month going into a special “savings” account. At the end of a specified period, you buy the home using the money in that special account as your down payment. However, if you decide somewhere along the line not to purchase the home, all of the money in the special account then goes to the seller.
Think of this option as renting with a forced savings account. If you can find someone willing to do this, and your credit isn’t the best, it’s not a bad option. However, most people who are selling their homes need their money out of it in order to buy their next home, so finding someone who is willing to lease to you may prove more difficult.
Also, it’s important to keep in mind, your monthly rental payment will likely be far less than the mortgage will be when you go to purchase the home. This is because rental prices have come way down, due to the vast inventory, while rising interest rates and higher values mean a higher mortgage payment for the same home.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
o Closing costs are usually minimal. Probably only a minimal security deposit.
o No minimum credit score required at the time of the lease option…just an agreeable seller. However, you will need to make sure your credit is good enough to exercise the option to buy the house at the time the lease period ends.
o No income disclosures are usually necessary.
o You will usually not be required to show two month’s of your new loan payment in the bank for reserves nor any other banking information.
o Risk is very high as you are not dealing with a trusted institutional lender.
o Plan on higher rates and unconventional terms.
100% FINANCING–NOT JUST FOR FIRST-TIMERS
100% financing is not just for first-time homebuyers. It’s for everyone and can be used to help you get more real estate business, especially in this tightening market.
I did a loan three years ago for Dave and Diane. They bought a beautiful $500,000 home…with no money down. The seller paid all of the closing costs.
Dave called me a few months ago to get pre-approved for a new home with a $1 million price. I was excited for them and asked him for the name of the agent he was working with so I could send the pre-approval letter over.
Dave said he didn’t have an agent yet. In fact, he didn’t even have the home picked out yet. He explained he was interviewing agents to list his current home, which he estimated was now worth $850,000. Once that home sold, he was planning on using his roughly $300,000 profit, after commissions, to put down on the new home.
A month later, he called and said he and Diane had found their dream home. It was $1 million, on the golf course, and was the listing of the agent who was representing his house as well. The agent had consulted with the seller of the $1 million home and they agreed to offer him a substantial discount if he would buy it and close within 30 days.
The problem was his original house hadn’t sold. “Aaron, we really want this house. If we don’t buy it now, I just know someone else will soon. What can we do?” We financed his new home…with no money down. The seller paid all of the closing costs. To make it even better for Dave and Diane, we structured the loan in such a way where he was not penalized, from an interest rate perspective, for having to make this tough decision.
We gave him a 70% first mortgage and a 30% second mortgage, as opposed to your traditional 80/20. This enabled him to get the best rate possible on a long-term first mortgage, with no need to ever have a costly refinance. The loan will eventually look the exact same as if he had sold his home prior to this acquisition. Dave and Diane were thrilled!!! When their home eventually sells, and it’s currently in escrow, they will simply pay off the second mortgage. They have the comfort of knowing they have a great first mortgage they can live with, in their dream home, for many years to come.
