Buying real estate for nothing down still possible

Several methods help minimize costs, maximize benefits
By: Robert J. Bruss: Inman News
"Is it really possible to buy a house for nothing down?"

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 I quickly qualified that statement by adding she needs good income and good credit. Her husband, standing nearby, perked up at that point and suddenly became very interested in the conversation.

Then I regaled them with brief stories of how I bought my personal residence and several rental houses for nothing down. I hope I inspired them to move out of their expensive luxury city apartment and buy their first 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 start toward eventually buying your perfect home."

Personally, the first "nothing down" residence I bought was a modest two-bedroom house, which, looking back, I would now classify as a "major fixer-upper." It was far from perfect, but it was a start.

WHAT DOES "NOTHING DOWN" MEAN?

The simple definition is "zero cash from your pocket to buy your home." However, that definition does not mean the home seller won't receive cash from the sale. In fact, the seller often receives 100 percent cash in a nothing-down home purchase.

If you have good income and good credit, mortgage lenders are thrilled to loan you 100 percent of your home's purchase price. But it won't be cheap!

Lenders usually charge a slightly above-market interest rate for zero-down-payment mortgages. In addition, they require PMI (private mortgage insurance), which requires a monthly premium to protect the lender's top 20 percent, or riskiest part, of the mortgage. PMI premiums are not inexpensive, so be prepared.

If you are a bit short of cash, the nation's largest secondary mortgage market home loan lenders, Fannie Mae and Freddie Mac, will even loan up to 103 percent of your home's purchase price to help pay the closing 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. Then you can receive a written pre-approval from an actual mortgage lender (not just pre-qualification, which means nothing) so you will know your maximum mortgage amount.

WHY SMART HOME BUYERS PURCHASE FOR LITTLE OR NO CASH. There are 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 no reason not to buy a house or condo. Even if you have lots of cash, why tie it up in your residence? There are many ways to buy a home for zero cash.

2.) YOU ARE A VERY SMART HOME BUYER WHO UNDERSTANDS LEVERAGE BENEFITS.

The second major reason for buying a home with little or no cash is to maximize your leverage benefits.

To illustrate, suppose you buy a $300,000 house for $300,000 cash and that house appreciates in market value at the historic nationwide average rate of 5 percent annually. In 12 months, it will be worth $315,000, or a 5 percent yield on your investment.

Instead, suppose you obtained a $300,000 zero-down-payment mortgage 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 infinite yield.

CREATIVE WAYS TO BUY FOR ZERO CASH DOWN PAYMENT.

Presuming you want to buy your next house or condo for little or no cash, there are many ways to do so. The most obvious is to obtain a 100 percent or greater new mortgage. But this method requires good income and good credit, and it can be expensive.

Instead, suppose you don't need 100 percent financing, but you don't want to tie up a bundle of down-payment cash. The first step is to get pre-approved with a mortgage lender for the maximum mortgage you can obtain. Be sure this approval is in writing from the actual lender, not a worthless "pre-qualification letter" from a mortgage broker.

The second step is to use that written lender's mortgage pre-approval to buy the home you want. If you keep the mortgage balance below 80 percent of the home purchase price, you have many alternatives:

One is the 80-10-10 plan where you obtain an 80 percent first mortgage, a 10 percent second mortgage, and pay a 10 percent cash down payment.

Another is 80-15-5 where you pay only 5 percent cash down payment and either the seller carries back a 15 percent second mortgage or the lender arranges a 15 percent second mortgage home equity loan. Either way, you receive 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 a written pre-approval letter or certificate from the actual lender, it's time to start shopping for a house or condo. However, in the back of your mind, be sure to consider how much home you can afford.

Armed with the confidence of a written pre-approval letter from a mortgage lender, you can decide what zero- or low-down-payment choice you 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 your purchase offer before another buyer steals your home. However, be sure your purchase offer contains two key contingency clauses for 1) a satisfactory appraisal of the home, as required by your mortgage approval letter, and 2) a professional home inspection.

Unless you got carried away and offered too much for the house or condo, the appraisal contingency should not be a problem. However, the home inspection is vital. Be sure to accompany your inspector to be certain there are no latent or surprise home defects discovered.
If your inspector discovers a serious undisclosed home defect, then you can either negotiate for a "repair credit" toward your purchase price or cancel the sale and obtain a refund of your earnest money deposit if the seller refuses to be reasonable. More details are in my special report, "Secrets of Buying Your Home or Investment Property for Nothing Down," available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.