How to buy your next home for nothing down

'Hard part is making the payments'
By: Robert J. Bruss: Inman News
Are you old enough to remember Robert G. Allen's bestseller real estate book "Nothing Down" from the early 1980s?

I'm showing my age, but I vividly remember that book because a) it explained dozens of creative real estate finance methods, and b) I actually used several of those techniques to buy profitable property for nothing down.

Most of those 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.

Today's mortgage lenders have become very savvy about the profitability of making low- and no-down-payment home loans, 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. Personally, I bought several zero-down-payment houses where the sellers walked away with all-cash.

Nothing down really means the buyer is borrowing the entire purchase price.

To illustrate, 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.

BUYING A HOME FOR NOTHING DOWN IS EASY.

If you are in the market to buy your personal residence, but you are a little "cash-challenged," don't let that stop you from 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 1) a reliable source of income, and 2) 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. But you will probably pay an above-market interest rate, often including PMI (private mortgage insurance) premiums. 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.

To check your credit reports from all three national credit bureaus, and determine your FICO (Fair Isaac Corporation) score which most lenders use to rate you as a "well-qualified buyer," just go to www.myfico.com.

For $44.85 total, you will receive your three credit reports, and your FICO credit score. Each credit report will be different, so take time to compare them and follow the instructions to correct any errors.

Or, at no cost, you can obtain all three of your credit reports at 1-877-322-8228 or www.annualcreditreport.com. However, you will not receive your very important FICO score at this free source.

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 pre-approval 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.

However, 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, 10, or 15 percent second mortgage, often in the form of a home equity loan.

If you can make a 5 to 10 percent cash down payment, that makes obtaining financing even easier. 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 (private mortgage insurance) premiums.

However, in the right circumstances, "seller financing" might be your best and least expensive choice.

Large real estate fortunes have been earned with this method. For example, real estate tycoon, John Schaub, reports in his recent bestseller book, "Building Wealth One House at a Time," he never obtains bank mortgages when buying.

Another example is small-town realty mogul, Jay DeCima, who explains in his best selling, "Start Small, Profit Big in Real Estate," 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 cash is "high leverage." It simply means the borrower controls the entire property with a small amount of cash.

The big leverage benefit is usually a high percentage profit-per-dollar invested if the property goes up in market value due to capital improvements or sales price appreciation.

For example, suppose you buy a house or condo for $200,000 with nothing down. Because of your good income and good credit, the mortgage lender approves a $200,000 mortgage. Suppose that house appreciates in market value by 5 percent annually, or $10,000 in the next 12 months. What percentage return 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 that same 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 savings should be added to your return.

As the years go by, the advantages of high leverage on your home 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 when you 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 the monthly payments."