Buying a Home With Zero Downpayment
Believe it or not, even though you may have heard that lenders have tightened their grip on loans, as long as you meet the conditions of your lender and the Fair Housing Administration, it is very possible to buy a home with nothing down.
It was a beautiful Memorial Day this past Monday, May 26th in Phoenix, Arizona. The sun was out, the air was cool, and the beer tasted magnificent. What a day for a pool party. In my sphere of influence, we have a few regular gatherings in which we share our lives, our ambitions, fears, and failures. Monday happens to be called Lazy Monday, because we get together and cook and eat and talk, and that’s where I had the opportunity to speak with one of my married friends about the realistic possibility of purchasing a home.
One of the interesting facts about their situation is that even though they’re married, even though they’re of age to vote and drink, they consider themselves to be young. Too young. Too young to be responsible enough to purchase their own home. After explaining a few things to them, including the fact that it wasn’t until I had reached age 30 that I had myself purchased a home, it became clear to them that they might just be able to purchase a home, and then they appeared as though they were defeated. They seemed to be down on the fact that they had missed out on an opportunity. You see, they are currently living in a home owned by their parents, and they are planning on moving into another one of their parents’ homes to rent for a year, this June.
The most common objection I hear first time home-buyers offer up is that they don’t have any money to buy a home. It’s an understandable fear. Newly married, tight on the budget, looking for a place in the world, starting out a new career and a new business. Of course it’s overwhelming. But that’s what we’re here for. Our job is to educate the buyer so he or she knows that it’s very possible to own a home, and it’s even possible to get into a home with no money down.
Don’t worry, even though the prospect of no money down in today’s market conjures up thoughts of mortgage fraud, I can assure you there are programs in place to help the first time home buyer.
STEP 1: Get pre-qualified.
Find a good lender and find out where you stand financially. You need to know what you can afford. Remember that renting makes the other guy rich. Develop a baseline from which you can start. If you know how much your lender will loan you, you know what type of home you can purchase. Working out the down payment comes later.
STEP 2: Find the right home.
There are currently 36,224 active listings in Maricopa county that may qualify for FHA financing. Some properties, depending on the ratio of investment properties to owner occupied properties in a given development, are not eligible for FHA financing.
(Note: The Federal Housing Administration does not write loans. They insure loans. Most major lenders can lend within FHA guidelines and according to FHA programs.)
To qualify for any zero down program, you’re going to have to keep your prospective home price at or below the current FHA limits. I can help you find the perfect home by setting up the types of searches that internet search sites only offer members of their local MLS board. Sites like Realtor.com and Trulia.com only allow you to select limited criteria. I can drill down through the data to find very specific information for you, and I have access to the homes, so I can show them to you. Don’t go into the home buying process with the expectation of finding a stellar bargain. What you’re going to focus on is finding a home that you can get into for zero down. Susan Gruenling of SonoranHouse.com recently wrote in an article entitled “Is the Right Time to Buy Now?” writes:
Buyers, you need to realize that with more homes on the market now you have increased negotiating power. And the negotiating is not limited to just the purchase price, but includes closing costs, closing date, home warranty, HOA transfer fees, repairs and other options. It is important to work together with your Realtor to structure your best offer.
STEP 3: Make an offer on the home.
This is where the zero down payment comes into play. On a conventional loan, it is common to see the buyer ask the seller to cover some of the expenses that the buyer would normally be paying for. For instance, they may ask the seller to contribute up to 6% of the purchase price towards closing costs, pre-paids, and acquisition fees.
So let’s expand on that simple idea. You, the buyer, decide to purchase a home for $100,000. Your offer, when prepared properly by a competent REALTOR, will ask the seller to contribute a percentage of the purchase price towards closing costs. In this case, we’ll ask for 3% concessions. This reduces the amount that you’ll need to borrow from $100,000 to $97,000. We could essentially call this a 97% offer, meaning if the seller accepts your offer, it would be just like offering $97,000 with no concessions, and most sellers will jump on it. Asking for concessions keeps the selling price of the home at $100,000 which helps stabilize the market, rather than reducing the neighborhood pricing.
“Well, that’s fantastic,” you say, “but how does this help me with a down payment, which the FHA financing still requires, and we don’t have?”
Answer: The AmeriDream Down Payment Gift Program
AmeriDream, established in 1999, is a 501(c)(3) charitable organization creating opportunities for qualified low to moderate income individuals and families to purchase affordable homes, improve their financial lives, begin a family legacy, and strengthen their communities. AmeriDream provides a wide range of programs to benefit the individuals and families it serves, including homebuyer education, foreclosure prevention, building affordable homes, and providing financial support through privately-funded down payment gift assistance.
Through the AmeriDream organization, a home seller can be asked by you, the buyer, to contribute up to 10% of the purchase price towards down payment assistance for future home buyers. At closing, AmeriDream will cover the agreed-upon down payment amount from previously collected gifts that other sellers have contributed to AmeriDream.
“Why would the seller want to forfeit some of their net return on their home to benefit the buyer?”
Like I mentioned before, in a market where the seller is motivated, it’s highly likely that a 90% offer would be accepted. If you were to come to the table with a 100% offer, then ask for 3% towards closing costs and 3% down payment gift to AmeriDream, then you’re essentially coming in at a 94% offer, and if the seller was ready to accept 10% less than asking price, they’re sure to accept 6% less. Sure, you could ask for more, in fact, you can ask for up to 6% of closing costs and 10% towards AmeriDream, but this is stretching it, as most sellers will see $16,000.00 lost for every $100,000 of purchase price. Who knows? Perhaps they would take it if they were desperate enough.
The benefit to asking for this type of concession is that it will keep the price of the home where it should be, because you’ll be making a full price offer (provided the home is priced right), and you’ll be purchasing a home where the seller covers your minimum down payment requirements for FHA insured financing.
Make sure you check with your lender to confirm the cap on concessions before you proceed with the home buying process.
STEP 4: Proceed
Step 4 will only occur if the seller accepts your offer, and we’ll save that for another article.