By Robert J. Bruss, Inman News
Would you like to buy your next house or condo for no cash down payment, but you are a bit "cash challenged" at the moment?
If that is your situation, you are not alone. Many prospective home buyers share your circumstance. But don't despair. Every day, thousands of home buyers successfully purchase their residences for "nothing down."
By the way, the definition of "nothing down" means no cash from your pocket.
There are many ways to buy your next home for nothing down. But it takes knowledge to understand the secrets that mortgage lenders, home sellers and realty agents often are reluctant to reveal. However, you came to the right place.
TWO MAJOR REASONS FOR BUYING A HOME WITH LITTLE OR NO CASH. Presuming you are motivated to buy a house or condo, there are two primary reasons to buy your next residence for nothing down.
1. YOU DON'T HAVE THE CASH FOR A DOWN PAYMENT. This is the primary reason most home buyers who purchase for nothing down are successful. They just don't have the cash for a typical home down payment. As a result, they often negotiate spectacular finance terms.
2. YOU ARE A VERY SAVVY HOME BUYER WHO UNDERSTANDS THE BIG BENEFITS OF BUYING FOR LITTLE OR NO CASH. Even if you have lots of cash, keep it in your pocket. Savvy home buyers understand the big benefits of paying little or no cash for their homes.
Can you keep a secret?
It's called "leverage" or using OPM (other people's money). That means you control the entire property with little or no cash from your pocket by borrowing OPM from a bank or other mortgage lender.
For example, suppose you find a $100,000 house or condo for sale. Presuming you have lots of spare money, you pay $100,000 cash. If your residence appreciates in market value the average 5 percent annual appreciation rate for the last few years, you will enjoy a 5 percent return on your $100,000 cash investment. Not bad.
Instead, suppose you paid nothing down to buy the same $100,000 house or condo. But it still appreciated $5,000 in market value. What is your return on invested dollars? It is "infinite!" Yes, you had to make monthly mortgage payments, but after the income-tax deductions, those payments are usually equivalent to monthly rent for a comparable property.
LENDERS WANT TO MAKE ZERO-DOWN-PAYMENT HOME LOANS. Although not well publicized, mortgage lenders want to make low- and no-down-payment mortgages to credit-worthy home buyers. Fannie Mae and Freddie Mac, the nation's largest mortgage lenders, even have programs loaning up to 103 percent of home purchase prices for well-qualified home buyers.
OBTAINING 100 PERCENT FINANCING IS NOT CHEAP. In the interest of full disclosure, home buyers making zero or low down payments should be aware of the possible expenses unless they know how to cut costs.
If the mortgage lender loans more than 80 percent of your home purchase price, you will be expected to pay PMI (private mortgage insurance).
Although PMI enables you to buy a home for little or no cash, it costs $50 to $100 or more per month to insure the lender against a loss on the top 20 percent of the mortgage in the rare event you default and the lender suffers a foreclosure loss.
But there are ways to avoid PMI, such as obtaining an 80 percent first mortgage and obtaining a 20 percent home equity loan. Another alternative is called 80-10-10, meaning an 80 percent first mortgage, 10 percent second mortgage, and 10 percent cash down payment, or the motivated seller carries back a 10 percent third mortgage.
THREE STEPS TO BUY YOUR HOUSE OR CONDO FOR NOTHING DOWN. Now that you are convinced of the advantages of paying little or no cash for your next home, it's time to reveal the secrets. Incidentally, as home mortgage interest rates slowly rise, that will discourage other competitive home buyers, making your nothing-down home purchase easier.
STEP ONE – CHECK YOUR CREDIT AND "FICO SCORE." Virtually every mortgage lender checks your credit reports and FICO score. FICO (Fair, Isaac and Co.) rates your credit on a scale up to 850. Incidentally, nobody earns that high score.
To obtain your credit report and FICO score, the best place is www.myfico.com. For $14.95 you can obtain your credit report and FICO score there, along with tips on how to improve your credit report and FICO score. But I recommend the 3-in-1 report for $29.95 to check your credit reports at all three national credit bureaus.
For example, when I recently checked my credit report and FICO score (which is over 750), I was told I should get rid of my unused credit cards to improve my FICO score.
STEP TWO – GET PRE-APPROVED IN WRITING BY A MORTGAGE LENDER. Before beginning to shop for a house or condo to be purchased for nothing down, presuming your credit report is in good shape and doesn't contain any errors, with a FICO score of at least 650, it's time to get pre-approved in writing by an actual lender.
Although mortgage brokers can obtain a lender's pre-approval letter or certificate, don't be fooled by a mortgage broker's pre-qualification. That means nothing because it is not a written commitment from an actual mortgage lender.
Tell the lender you want to buy a house or condo with little or no cash. You won't get the lowest mortgage interest rate, but with good credit, good income, and a decent FICO score, you will be able to buy for virtually nothing down.
STEP THREE – WHEN YOU SPOT A SUITABLE HOME, MAKE A PURCHASE OFFER. Armed with your written mortgage lender's pre-approval letter or certificate (not just a pre-qualification letter), you are ready to make a purchase offer when you find the right house or condo.
Look for motivated sellers. Signals include vacant houses or condos. A garage filled with packed boxes is another sign.
Work with a savvy realty buyer's agent who is experienced in the local home sales market. Such an agent can represent you both for homes listed with the multiple listing service and even "for sale by owner" homes.
When you find a home you want to buy, don't develop "the paralysis of analysis." This disease often discourages home buyers from making a written purchase offer. A savvy buyer's agent can quickly overcome this problem by encouraging you to make your nothing-down purchase offer and helping you to a successful purchase closing.
More details of how to buy your next home for little or nothing down are available in my free special report, "Secrets of Buying Your Home or Investment Property for Nothing Down," available at www.bobbruss.com.
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