Contributed by:
Joanne Rocheford, Mortgage Loan Consultant
PH: (206) 242-0800 FAX: (206) 225-2017
Rocheford@msn.com
Editors’ Note: This is guest contributor Joanne Rocheford’s second article for Seattle Real Estate Talk.
In my previous article, I wrote about three ways to purchase a home with no down payment. The second type of financing I described was the 80/20 loan. A buyer obtains a first and second mortgage at the time of purchase to cover the full price of the home. The advantage of this type of loan is one doesn’t have to pay mortgage insurance. This has been an extremely popular way to finance homes this year.
What I didn’t explain previously is that conforming lenders require a 680 credit score to qualify for this type of financing. If you have a score lower than 680, most banks cannot offer you an 80/20 loan. There are however non conforming lenders (translated: higher interest rates, higher loan origination fees) also known as sub prime lenders that will offer you a two year fixed first mortgage followed by a thirty year fixed second mortgage that has a balloon payment due in 15 years. This was still a popular option because the rates have been similar to conforming loans for a two year fixed loan as opposed to a conforming thirty year fixed.
It made sense to go with this type of loan because having a mortgage caused the credit score to go up and one could refinance after two years to a conforming thirty year fixed loan. After two years had gone by, the Pacific Northwest homes would have appreciated enough to completely refinance the second mortgage away.
In the past few months, if you didn’t have perfect credit, you could still get a 6% or less interest rate on the first mortgage and 8 -10% on the second mortgage. I swear I barely blinked and now we’re back into the 8% and 12% arena that I saw three years ago.
With sub prime interest rates having risen dramatically, the popularity of the FHA loan is back. Even with mortgage insurance, the payment on an FHA loan is now more often lower than a non-conforming 80/20 loan. Closing costs on an FHA loan are usually over $1000 less than an 80/20 as well. If you have terrific credit, pat yourself on the back and have your lender compare both payments to see which loan option makes the most sense for you.
The Secrets of Borrowing from Uncle Sam
An FHA loan is a government loan. FHA loans are not credit score driven but look at your payment history. An FHA loan requires 3% down. However, listen closely because people pay lots of money to learn the following secrets: there is a loophole in the FHA underwriting guidelines that allows gift money to be given to you to cover the 3% down payment, your loan closing costs, and your prepaid items (first six month’s property taxes and first year homeowner’s insurance.) This gift money can be from a relative or from a non-profit company. There are several non-profit companies that offer gift money for purchasing a home. Alas, there is always a catch. It isn’t just “free” money like it sounds, or that the infomercial gurus would have you believe.
Back in the day when sellers were having a harder time selling their home and it was a buyer’s market, a buyer could offer a seller full price to purchase their home and ask the seller to participate in a gift program. The seller would oblige in order to sell their home. Today, we have to get a little creative.
Here’s How It Works:
Seller is asking $210,000 for their home. Buyer offers $221,000 and asks the seller to make a tax deductible contribution to a non-profit charity in the amount of $11,000. The non-profit charges an administrative fee of $295 to $795 for their services. The non-profit gives the buyer a gift for $11,000 that doesn’t have to be paid back. The non-profit asks the seller to “replenish the down payment assistance pool.”
One client from two years ago was afraid to purchase a home. His real estate agent and I showed him how we could get him in a home with him paying only $400 out of pocket for his inspection. He purchased a $150,000 house in South Seattle. We marked up the price as described above. His home is now worth $230,000 just a couple of years later. Needless to say, he is very happy we encouraged him to step a little bit out of his comfort zone.
I can tell many a tale like this one.
So there you have it. One more way to purchase a home without any money down. With interest rates continuing to inch up and house pricing continuing to leap on up, what are you waiting for?
Technorati Tags: Affordability, Evergreen Moneysource, Financing, Joanne Rocheford, Mortgage, Real Estate
