Don’t Let Lack of Cash Keep You From Owning

Like many young couples who rent, Troy and Naomi were long on ambition but short of cash for a down payment on a home.

A no-down-payment mortgage solved the problem.

Because they have good income, pay their bills on time and have good credit reports, a major lender pre-approved them for a no-down-payment mortgage up to a maximum amount.

Thanks to their mortgage pre-approval and with the help of a $10,000 loan from Naomi’s parents to cover the closing costs, they recently bought a “starter” house with virtually zero cash down.

Never before has it been easier to buy a house or condo without cash for a down payment. Several mortgage lenders will even lend up to 103% of the home’s purchase price so that closing costs can be included.

But before talking with a mortgage broker, banker or mortgage banker, the first step to buying a home with zero down is to get a copy of your credit report. Better yet, learn your credit rating.

Although it costs $12.95, the best source is https://www.myfico.com on the Internet. If you don’t have access to a computer, your public library reference department can show you how to get your credit report and FICO (Fair, Isaac and Co.) score with a credit card.

If your FICO score, which predicts your probability of mortgage default, is above 620, you have good credit. Above 700, you’re a “slam dunk” for a zero down payment home purchase.

As Troy and Naomi did, the second step to buying a home for zero cash is to get pre-approved in writing by a mortgage lender, such as a bank or mortgage banker. If a mortgage broker says you are pre-qualified for a home loan, that means nothing. Insist on a written pre-approval letter or certificate from the lender.

Even if you don’t qualify for a 100% home mortgage, don’t be discouraged. There are many other ways to buy your residence without much cash.

The definition of “nothing down” for home buyers is that none of the cash for the home purchase comes from the buyer’s pocket.

To illustrate, I bought my first home (it was a triplex with a house at the front of the property and two rental units at the rear) for zero cash down payment. My parents loaned me the $5,000 down payment, and I took over the existing mortgage. Later, the S&L; lender “called” that loan. I learned that really meant the lender wanted me to pay a one-point (1% of the loan balance) assumption fee to assume the loan, which I reluctantly did.

If you’re a qualified veteran, VA home loans offer 100% financing, except for various closing costs. Non-veterans should consider FHA mortgages for 3% to 5% down payments, or private mortgage insurance home loans for 90%, 95%, 97% and 100% of the home purchase price.

Every day, thousands of U.S. buyers purchase houses and condos for nothing down, often by borrowing all or part of the down payment from parents, friends, credit cards or other lenders. Here are the “top five” advantages of zero down payments:

* Buyers will own a house or condo that is likely to go up in market value. That’s better than losing money on rent.

* Leverage (which means controlling an asset with little or no cash investment) gives the owner the benefits of market value appreciation without tying up large cash amounts.

* The income tax deductions for mortgage interest and property taxes reduce the after-tax cost of home ownership. Mortgage loan fees paid to the lender in the year of home purchase are also tax-deductible as itemized interest.

* If you invest little or no cash in a home purchase, your downside risk is limited if the residence declines in value. To illustrate, if you buy a house or condo for zero down payment, your maximum loss is also zero, as long as you keep making the payments. But if the residence appreciates in market value, your return on invested equity dollars is “infinite” because you didn’t make any down payment.

* Owning a home, after considering the income tax deduction subsidy from Uncle Sam, costs about the same as renting equivalent housing. More important, ownership usually builds home equity instead of a worthless pile of rent receipts.

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Robert J. Bruss is a syndicated columnist as well as a real estate investor, lawyer, broker and educator in the Bay Area.