Is buying a home with no money down a practical goal? Actually, it has become easier than ever. But unfortunately, it has also become more necessary than ever, since fewer and fewer people seem to be able to save money. In fact, I would like to respectfully suggest that if you need to buy your home with no money down, you may have a more general problem with your finances that needs to be worked on first. But in any case, there are times when it makes sense to eliminate that down payment, so let’s look at four ways to do it.
1. Use credit cards. Here is a great way to get into more financial trouble or, if you handle it right, a good way to stop spending your housing dollars on rent. Get a $95,000 loan on a $100,000 condo, for example, and you only need $5,000 for the down payment. Now you just need a cash advance on a credit card when there is a low-interest promotion.
Of course, you can’t “borrow” for a down payment according to many lender’s rules, so get the cash advance a few months earlier for a “vacation,” which can be a $20 taxi ride downtown. Leave the rest of the money in your checking account until it is time to buy a house. Since a lender can’t read your mind or know what your intent was, this is legal. But is it unethical? Hmm… Lenders encourage you to take out unsecured loans for vacations and depreciating assets like cars and boats while saying you shouldn’t borrow for a down payment on a home. Perhaps THAT is unethical, but playing by the rules and repaying everything you owe is not unethical in my book.
Have a plan to quickly repay the cash advance. You could, for example, commit to using $2,000 of your tax refund to repay the balance, and also pay $150 on it each month. You’ll have it paid in less than 2 years this way, and if you can’t do that, you’re probably just creating more problems for yourself by using credit cards.
2. Have the seller finance it. Since they typically need at least some cash, how can a seller provide all the financing? You can create two notes, one for him to sell, as in the following example.
A seller is asking $220,000 for his home and expects to get about $210,000. He needs at least $150,000 in cash to pay off his $130,000 mortgage and have some “travelling” money (for whatever). You pay $240,000 for the home, in the form of two mortgage notes, one for $200,000 and the second for $40,000. You have arranged for a “note buyer” to buy the first from him for $170,000 at closing.
He gets $170,000, plus payments on the other $40,000, meaning he got the $210,000 he expected. However, you did overpay for the home – necessary due to the steep discounting ($30,000) on the sale of the first note – and you’ll have two monthly payments. So there are only certain times when this technique will make sense (like when you can rent a property for more than what the two payments and other expenses add up to.)
3. Have the seller finance part. Get a mortgage loan for 90% of the purchase price, and make payments to the seller on a second mortgage note for the other 10%, and you have a no money down deal. Sellers may only be willing to do this if you pay full price or close to it. Also lenders on the first mortgage may not agree to it, so ask.
4. 100% first mortgage loans. Some lenders still do these (it is mid-2007 as I write this). If the seller will pay closing costs, you won’t need much cash at all. Of course, you’ll probably pay higher interest rates for these loans.
A seller usually needs some cash. They get it in every example above, but you may have noticed that it doesn’t have to be your money. Think about “no money down” as “How do I give the seller what he needs without using my own cash.” This is the key to buying a home with no money down.