Buyers love seeing and hearing those words. And why wouldn’t they? First-time buyers make up 40 percent of the home-buying market. This is nearly half of all homes sold. Consider this. There were just over seven million homes sold in 2005, not including new construction homes. This means that nearly THREE MILLION buyers bought their first home last year. If you are a real estate agent, marketing to this segment is an absolute must! More than four out of every ten bought this home with no money down of these first-time homebuyers.
On average, first-time homebuyers put down less than 2%. Around ten years ago, the average first-time homebuyer put down a little more than 10%. I would say that nearly seven out of every ten loans I do have 100% financing, and it’s not just first-time homebuyers. However, most potential first-time buyers don’t realize this option is available, so this newsletter will focus on them.
The real estate market has largely flourished over the last few years due to 100% financing for first-time homebuyers. Suddenly, buying a home is possible for nearly everyone. More first-time buyers have been able to enter the marketplace than ever before. Banks have become more liberal, and lending standards have loosened. There are many, many ways to get 100% financing.
You can get 100% conventional financing with credit scores as low as 620 and a fairly recent bankruptcy. You may be able to get a government loan with an even lower credit score. 100% financing is available for nearly every borrower. You can even buy a $2,000,000 home with no money down today. That’s two MILLION, not a typo at $200,000. Amazing, but true. Many potential first-time homebuyers never consider buying a house because they don’t believe they have enough money to pay down. They’ve been told through the years that they need a 10-20% down payment to buy a home. This isn’t true.
Let’s look at most of the 100% financing options:
1) 100% No Down Payment Programs.
These programs require the buyer to pay ordinary closing costs. These programs come in all varieties, from 2, 3, 5, 7, and 10-year adjustable-rate mortgages to 30-year fixed mortgages. All are usually available as interest-only, too.
PROGRAM HIGHLIGHTS AND HOW DO I QUALIFY FOR THIS?
2.5%-3.5% of the total loan amount in cash is required to pay closing costs and two months of your new loan payment in the bank for reserves. Stated income, stated assets, and even No Doc are options with decent credit. Plan on having a mid-credit score of at least 660 if you cannot fully disclose your income to qualify. If you can fully tell your payment to allow, your mid-credit score can sometimes be as low as 580. These loans are designed for people who have some money for closing costs. You can qualify for this with credit scores as low as 580. This is the most popular 100% financing option on my team.
2) 100% No Down Payment and Seller Pays Your Closing Costs.
The same loan program as #1, with all of the same loan program options above, has a different twist. The seller pays all of the 2.5%-3.5% in closing costs. If your buyer has no money but fairly decent credit, this is the way to go. The seller pays 2.5%-3.5% of the total loan amount for closing costs. You must still show two months of your new loan payment in the bank for reserves. Stated income, stated assets, and even No Doc are options with decent credit.
Plan on having a mid-score of at least 660 if you cannot fully disclose your income to qualify. 580 mid credit score is usually the minimum required on full doc loans, but plans on a much higher interest rate. These loans are designed for people who have no money for closing costs. Nearly every loan program today allows the seller to pay your closing costs. This means no money out of your pocket.
It is not a big deal if you don’t have the necessary reserves or can’t get them, and you should still be able to get the loan. However, it’s important to notify your preferred lender immediately as this could change the availability of the loan program and, likely, your interest rate.
3) 103% Loan With No Down Payment and little or No Closing Costs.
Maybe your seller refuses to pay closing costs, and your buyer has no money to close. Then, 103% loan programs may be the way to go. This means the lender finances the closing costs as well. The requirements of this program are stricter, and the options are fewer.
The lender pays 2.5%-3.5% of the total loan amount to pay closing costs and ties this into your loan.
You still may be required to show two months of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is NOT usually an option regardless of your credit.
o, Plan on having a mid-score of at least 620.
These loans are designed for people without money for closing costs, and the seller refuses to chip in.
The interest rates on these programs are higher, and the program selection is more limited. If possible, it’s better to go for #1 or #2.
4) VA Loans
If you are a Veteran, VA loans require no money down, and the seller can pay your closing costs. The rates are excellent, and the credit requirements are not very high.
o, Must be a veteran on active duty or honorably discharged.
The seller usually pays 2.5%-3.5% of the total loan amount to pay closing costs, but the Veteran can deliver, too.
o, Must fully disclose your income to qualify. You cannot go stated income or No Doc.
You will not be required to show two months of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is NOT an option regardless of your credit.
o, Plan on having a mid-score of at least 560 – 580, although no formal guideline exists.
These loans are designed for Veterans only.
5) FHA Loans
This isn’t a “No Money Down” option. However, many first-time homebuyers have found that the FHA loan is one of the best alternatives when they don’t have much money to put down. You could put down as little as 3% with an FHA loan. FHA loans are easier to qualify for. If your credit is less-than-perfect, the rates on an FHA loan are usually far better than the subprime alternative you may be facing. For example, if you have a 580 mid-credit score, your options may be FHA or a subprime loan. FHA would probably be cheaper for you.
Now, 3% may seem like a lot to come up with, but many people find that it’s not that difficult when they put their minds to it. FHA allows this 3% to be gifted to you by a family member, employer, or charitable organization. FHA loans do have stringent requirements and restrictions. Not all townhomes and condos qualify, and there is a maximum loan amount you can get. You can check the FHA website for the lending limits in your area.
You are responsible for 2.5%-3.5% of the total loan amount to pay closing costs, but the seller can pay too… to 6%.
o, Must fully disclose your income to qualify. You cannot go stated income or No Doc.
You will not be required to show two months of your new loan payment in the bank for reserves.
o Stated income, stated assets and even No Doc is NOT an option regardless of your credit.
Plan on having a mid-score of at least 550 – 580, although there is no guideline on this, and you may be able to qualify with a lower score.
If you are using a non-occupying co-borrower or have a roommate renting a room from you whose income you would like to help you qualify, this may be the best way to go.
Many other loan programs don’t allow you to consider these sources and do 100% financing.
6) Owner Financing
Owner financing means the owner (or seller) finances all or a portion of your home purchase. For example, you might borrow 80% of the value of a home from a mortgage bank and “borrow” the other 20% from the owner. In this situation, the owner “carries back” a second mortgage. Or he could carry 100% of it. For the average homebuyer, owner financing is complicated and requires tricky negotiating. In my opinion, it’s generally a bad idea.
However, this may be the only way to go if your credit score prevents you from getting a 100% loan. If you have successfully negotiated a deal where the seller carries the mortgage, you should contact a skilled attorney to protect all parties, especially you. Sellers don’t usually want to take loans for 30 years as mortgage companies do, so plan on your seller-financed loan having a much higher interest rate than a mortgage company can offer you.
Also, plan on having a balloon payment of some kind. Two to five years is normal. You must pay the loan in full or refinance it with a mortgage lending institution at the end of the balloon period. If the seller goes into bankruptcy or has serious personal financial troubles and loses the house, you may also be out, including all of the money you have in the property.
Closing costs are usually minimal.
No minimum credit score is required…just an agreeable seller.
No income disclosures are usually necessary.
You will usually not be required to show two months of your new loan payment in the bank for reserves or other banking information.
The risk is very high as you are not dealing with a trusted institutional lender.
o, Plan on higher rates and unconventional terms.
You shouldn’t rule out owner financing if you have poor credit. Just keep in mind that by looking for someone willing to help finance your purchase, you severely limit your choices, and a tremendous amount of risk is involved. Protect yourself with strong professional advice from your real estate agent and an attorney.
7) Lease-To-Own
With the tremendous increase of homes in inventory, combined with few who can afford them because of the rapid rise in value, this option is becoming more popular. With a lease-to-own or a lease option, you lease a home, like normal, but make larger payments to begin accumulating a down payment. For example, if a house normally leases for $1200, you might lease it for $1500/month, with $300/month going into a special “savings” account. At the end of a specified period, you buy the home using the money in that special account as your down payment. However, if you decide somewhere along the line not to purchase the home, all of the money in the special account then goes to the seller.
Think of this option as renting with a forced savings account. If you can find someone willing to do this, and your credit isn’t the best, it’s not a bad option. However, most people selling their homes need their money out of it to buy their next home, so finding someone willing to lease to you may prove more difficult.
Also, it’s important to remember that your monthly rental payment will likely be far less than the mortgage when you purchase the home. This is because rental prices have come way down due to the vast inventory, while rising interest rates and higher values mean a higher mortgage payment for the same home.
Closing costs are usually minimal. Probably only a minimal security deposit.
No minimum credit score is required at the time of the lease option…just an agreeable seller. However, you must ensure your credit is good enough to exercise the opportunity to buy the house when the lease ends.
No income disclosures are usually necessary.
You will usually not be required to show two months of your new loan payment in the bank for reserves or other banking information.
The risk is very high as you are not dealing with a trusted institutional lender.
o, Plan on higher rates and unconventional terms.
8) 100% FINANCING–NOT JUST FOR FIRST-TIMERS
100% financing is not just for first-time homebuyers. It’s for everyone and can help you get more real estate business, especially in this tightening market. I did a loan three years ago for Dave and Diane. They bought a beautiful $500,000 home…with no money down. The seller paid all of the closing costs. Dave called me a few months ago to get pre-approved for a new home with a $1 million price. I was excited for them and asked him for the agent’s name he was working with so I could send the pre-approval letter.
Dave said he didn’t have an agent yet. He hadn’t even had the home picked out yet. He explained he was interviewing agents to list his current home, which he estimated was worth $850,000. Once that home sold, he planned on using his roughly $300,000 profit, after commissions, to put down on the new house.
A month later, he called and said he and Diane had found their dream home. It was $1 million on the golf course, and the agent’s listing represented his house. The agent had consulted with the seller of the $1 million home, and they agreed to offer him a substantial discount if he would buy it and close within 30 days.
The problem was his original house hadn’t sold. “Aaron, we want this house. If we don’t buy it now, I know someone else will soon. What can we do?” We financed his new home with no money down. The seller paid all of the closing costs. To make it even better for Dave and Diane, we structured the loan so that he was not penalized, from an interest rate perspective, for making this tough decision.