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A Great time to be a buyer How to buy your house or condo for little or no cash
Reprinted from real estate expert Bob Bruss,2003 Inman News
Just in case you haven't been paying attention, sales volumes of new and resale homes are at record highs. Home mortgage interest rates are hovering around record lows. That means it is a great time to be a home buyer.
Even if you have credit problems, such as a bankruptcy, foreclosure or late payments, don't let that stop you from buying during this busiest time of the year to purchase a home. Today, there is a lender for almost every borrowing situation.
Although you won't get the lowest interest rate if you have a credit difficulty, your sub-prime high interest rate mortgage will enable you to buy a home. After a year or two of on-time monthly payments, you can probably qualify to refinance at a much lower interest rate.
BIG HOME DOWN PAYMENTS ARE HISTORY. Even if you have a ton of cash for your house or condo down payment, it's usually best to make a cash down payment of not more than 20 percent of the purchase price. The reason is you don't want to tie up all your cash reserves in one place, just in case you buy a "bad house."
Except in retirement communities where 100 percent cash purchases are frequent, most home buyers today purchase with small down payments.
Low or no down payments of 15, 10, 5 or even 0 percent are easily available if you have (a) a good job and (b) good credit. Even if you are less than perfect, you can obtain financing with low or no down payments, but the interest rate won't be ultra-low.
For example, a few years ago I sold a rental house to my tenants Melvin and Denise. Melvin had a great job working for the county. But these buyers had terrible credit. After about six months, a mortgage broker finally found a lender willing to loan to them but at an above-market interest rate. The mortgage broker advised Melvin and Denise to make their payments on time for a year or two and then refinance at a lower, more affordable interest rate.
If you have bad credit, or are having trouble financing your home purchase with little or no cash, an experienced mortgage broker can help. The best mortgage brokers have contacts with dozens of home loan lenders, many located out of the local area. These specialty lenders originate virtually all their mortgages through mortgage brokers.
Regardless of your down payment, if you have a bad credit report and low FICO (Fair, Isaac and Co.) credit score, expect to pay higher than the advertised minimal interest rates. For $12.95 you can check your FICO score and credit report at www.myfico.com. Virtually all mortgage lenders now use FICO scores to qualify prospective buyers.
MINIMIZE RISK BY BUYING FOR LITTLE OR NO CASH. About three years ago, I received a letter from an elderly widow who bought her condo for all cash, as many retirees do. Unknown to her (probably because she didn't ask), over 50 percent of the condo complex was occupied by renters. The result is mortgage lenders won't make loans there because of the potential high default rate due to so many non-owner occupied units.
The lady reported the maintenance is poor (because the absentee owners won't vote to increase monthly assessments) and there are many unpleasant renters living in the complex. But this cash buyer has her money tied up and she can't sell her condo (unless she can find another cash buyer).
Instead of paying cash, that condo buyer should have made a modest down payment not more than 20 percent and obtained an 80 percent mortgage. Then she wouldn't have most of her money tied up in an illiquid condo she hates and can't sell.
More important, most prospective home buyers today, especially first timers, don't have much cash for a home down payment. But they often have good jobs and good credit. Rather than wait to buy a house or condo, while prices escalate at a current annual rate about 6 percent according to the National Association of Realtors, these buyers can now purchase with little or no cash down payment.
Renters who think they should save for a large down payment to buy a home are mistaken. The reason is most renters can't save fast enough to keep pace with the rising prices of houses and condos. That's another reason to buy a home now rather than later.
HOW TO AVOID EXPENSIVE PRIVATE MORTGAGE INSURANCE. A big problem of buying a house or condo for little or no cash, with a large first mortgage is the lender will usually require PMI (private mortgage insurance) for the loan balance exceeding 80 percent.
The simple solution to avoid costly PMI premiums, typically $50 to $150 per month, is to keep the new first mortgage balance below 80 percent loan-to-value (called LTV) so PMI is not needed.
One method is to finance the home purchase on an 80-10-10 basis. That means a new 80 percent first mortgage is obtained, a 10 percent cash down payment is made, and the seller carries back a 10 percent second mortgage.
Another method is called 80-15-5. Again a new 80 percent first mortgage is used, but the same lender approves a 15 percent home equity second mortgage, and the buyer makes a 5 percent cash down payment.
Additional low and nothing down home purchase methods involve taking over payments on an existing first mortgage, supplemented by a second mortgage carried back by the home seller. Or perhaps you can borrow the down payment on an unsecured bank credit line or even on credit cards if the interest rate is affordably low. Better yet, a highly motivated seller with a free and clear home to sell will often agree to carry back the first mortgage with a small down payment. Not every home can be bought this way, but all you need is one.
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