Buy your next home for nothing down

Good things come to well-qualified buyers


By Robert J. Bruss
Inman News

Are you old enough to remember Robert G. Allen's bestseller real estate book "Nothing Down" from the early 1980s?

I'm showing my age, but I vividly remember that book because a) it explained dozens of creative real estate finance methods, and b) I actually used several of those techniques to buy profitable property for nothing down.

Most of those methods are still viable. But for the majority of today's home purchases, there is no longer a need to use creative seller financing and other innovative methods.

Today's mortgage lenders have become very savvy about the profitability of making low- and no-down-payment home loans, even to borrowers with poor credit. Last year, according to the National Association of Realtors, over 30 percent of home sales involved 100 percent financing in one form or another.

THE DEFINITION OF "NOTHING DOWN."

In real estate "nothing down" means zero cash from the buyer's pocket. However, it doesn't mean the seller won't receive 100 percent cash for the home. Personally, I bought several zero-down-payment houses where the sellers walked away with all cash.

Nothing down really means the buyer is borrowing the entire purchase price.

To illustrate, when you read in the newspaper that a commercial property sold for $50 million, do you think the buyer paid $50 million cash from his savings account? Of course not. Using a combination of a first mortgage, perhaps a second mortgage, plus a bank credit line, the investor-buyer probably didn't even pay the closing costs from his pocket. The same procedures apply to home purchases.

BUYING A HOME FOR NOTHING DOWN IS EASY.

If you are in the market to buy your personal residence but you are a little "cash-challenged," don't let that stop you from purchasing for zero cash from your pocket, just like the real estate tycoons.

Although not every mortgage lender offers zero-down-payment mortgages, a savvy mortgage broker can arrange your no-cash home purchase. Especially if you are a first-time home buyer (defined as not owning a house or condo within the last two years), most mortgage lenders offer extra-easy home finance plans.

But there's a catch. You will need 1) a reliable source of income, and 2) a good credit score. Many lenders now offer "stated income" mortgages where, with good credit, you don't even have to prove your income, such as with W-2s or tax returns.

If you qualify, and many home buyers can, lenders will gladly finance 100 percent, sometimes even up to 125 percent, of your purchase price. But you will probably pay an above-market interest rate, often including PMI (private mortgage insurance) premiums. In other words, "nothing down" isn't cheap.


HOW TO DETERMINE IF YOU ARE A "WELL-QUALIFIED BUYER."

If you pay attention to those "no cash required" radio and newspaper ads for some new houses and condos, in the disclaimer you will usually spot the words "well-qualified buyer." That means you must have good income and good credit.

To check your credit reports from all three national credit bureaus, and determine your FICO (Fair Isaac Corporation) score which most lenders use to rate you as a "well-qualified buyer," just go to www.myfico.com.

For $44.85 you will receive your three credit reports, and your FICO credit score. Each credit report will be different, so take time to compare them and follow the instructions to correct any errors.

Or, at no cost, you can obtain all three of your credit reports at 1-877-322-8228 or www.annualcreditreport.com. However, you will not receive your very important FICO score at this free source.

After checking your credit reports and FICO score, the next step is to get written preapproval for a no-down-payment mortgage. Most major mortgage lenders offer this service, or a mortgage broker can obtain a lender's preapproval written mortgage commitment at a low or zero up-front cost. To obtain a zero-down-payment mortgage, most lenders require a FICO score of at least 680.

Armed with your lender's written preapproval mortgage promise (subject to reasonable conditions, such as appraisal of the home you decide to buy), then you can shop with confidence knowing the maximum mortgage you can obtain.

But don't settle for a lender's worthless "pre-qualification" letter, which just means, "We think you can qualify for a mortgage but we really haven't checked you out yet."

HOW TO BUY A HOME WITH 100 PERCENT FINANCING.

However, if you can't qualify for a no-down-payment mortgage, don't give up. There are many alternatives. For example, many buyers' real estate agents recommend 80-20, 80-10-10, or 80-15-5 mortgage choices. The 80 means the lender makes an 80 percent first mortgage, and a 20 percent, 10 percent or 15 percent second mortgage, often in the form of a home equity loan.

If you can make a 5 percent to 10 percent cash down payment, that makes obtaining financing even easier. A special advantage of keeping the first mortgage at 80 percent or less of the home purchase price is you will avoid the dreaded PMI (private mortgage insurance) premiums.

However, in the right circumstances, "seller financing" might be your best and least expensive choice.

Large real estate fortunes have been earned with this method. For example, real estate tycoon, John Schaub, reports in his recent bestseller book, "Building Wealth One House at a Time," he never obtains bank mortgages when buying.

Another example is small-town realty mogul, Jay DeCima, who explains in his bestselling book, "Start Small, Profit Big in Real Estate," why he buys ugly run-down houses, which no mortgage lender, except the seller, will finance.

LEVERAGE ADVANTAGES OF NOTHING DOWN.

Another name for buying real estate with little or no cash is "high leverage." It simply means the borrower controls the entire property with a small amount of cash.

The big leverage benefit is usually a high percentage profit-per-dollar invested if the property goes up in market value due to capital improvements or sales price appreciation.

For example, suppose you buy a house or condo for $200,000 with nothing down. Because of your good income and good credit, the mortgage lender approves a $200,000 mortgage. Suppose that house appreciates in market value by 5 percent annually, or $10,000 in the next 12 months. What percentage return is that on your investment? The correct answer is "infinite," because your only out-of-pocket expense was probably for closing costs.

However, suppose instead you paid $200,000 cash for that same home and it appreciates the same 5 percent in market value ($10,000) during the next 12 months. Now your return on investment is a mere 5 percent. Of course, you avoided the tax-deductible mortgage payments, so those savings should be added to your return.

As the years go by, the advantages of high leverage on your home usually become greater each year. Of course, there is also risk, especially if you have to sell the home within the first five or 10 years when you don't have much equity.

SUMMARY: There are many advantages, and a few disadvantages, of buying a home for nothing down. But the pros usually outweigh the cons. However, as Allen often said in his "Nothing Down" lectures, "Buying real estate for nothing down is easy; the hard part is making the monthly payments."

Go to www.LagretRealEstate.com

Smart home buyers avoid dual agency

Why hiring your own agent is so valuable

By Robert J. Bruss Inman News

If you are considering buying a house or condo during this peak home-buying season, an issue that has probably crossed your mind is, "Who represents me in this home purchase?"

When visiting a weekend open house, it pays to understand that the friendly agents you meet there represent the home sellers. Although they have duties of honesty and truthfulness to you, a prospective buyer, as listing agents their prime duty is to get the best price and terms for their sellers.

HOW TO BUY A HOME IN TODAY'S "BUYER'S MARKET" IN MOST CITIES. Because there are more houses and condos listed for sale in most communities than there are qualified buyers, that is known as a "buyer's market." The buyer is king.

Unfortunately, many buyers (especially first-timers) are not aware of the best ways to buy a home to get the best price and terms. The place where more than 70 percent of today's home buyers start their search is on the Internet, usually at www.Realtor.com and other large Web sites showing most local listings available.

After searching local residence listings available and perhaps visiting a few open houses, the next step for savvy home buyers is to get preapproved in writing by a mortgage lender. The reason for this key step is to avoid disappointment later if you discover you have credit issues or can't afford to buy the home you want.

Mortgage preapproval means the mortgage lender takes your loan application, runs a credit check, verifies the information, and issues a mortgage certificate or letter stating the maximum mortgage that lender will approve. Expect reasonable preapproval conditions such as (a) the lender's satisfactory appraisal of the property and (b) reverification of the applicant's financial information, including employment, shortly before the sale closes.

The reason mortgage preapproval is much better than mere prequalification is that an actual lender makes a loan commitment to you. A mortgage prequalification means merely that based on the borrower's information, which has not been verified, it looks like you can get a home loan.

PROS AND CONS OF "DUAL AGENCY." In most states, a home's listing agent can also represent the buyer in the same transaction. This is called a disclosed "dual agency" when buyer and seller understand one agent represents both parties.

Some states have laws allowing the listing agent to represent the home seller while another agent in the same brokerage firm, called a "transaction agent," represents the home buyer.

Home buyers should fully understand who represents whom in the sale. When there is only one realty agent in a transaction, that agent either represents the seller alone or can be a dual agent representing both seller and buyer.

When acting as a dual agent, the realty agent has a fiduciary duty of honesty, truthfulness and full disclosure to both parties. However, a dual agent is not required to disclose (a) the lowest price or terms the seller will accept, and/or (b) the highest price and best terms the buyer is willing to offer.

Just as an attorney would never represent both parties in a divorce or a lawsuit, real estate dual agency creates an inherent conflict of interest that can be difficult for agents to handle. For this reason, most states now require real estate agents to provide written agency disclosures so home buyers and sellers know who represents whom.

DO SMART HOME BUYERS NEED THEIR OWN BUYER'S AGENTS? As a prospective home buyer, you are probably wondering why some buyers hire their own agents. The key reason is a buyer's agent who looks out for his or her client's best interests will emphasize to the buyer the pros and cons of each residence inspected.

But even the world's greatest "dual agent" representing both buyer and seller is unlikely to highlight to the buyer the disadvantages of a home that said agent listed for sale.

Any licensed real estate sales agent or broker can be an exclusive buyer's agent in a transaction. Because most buyer's agents also accept residence listings, if a buyer wants to purchase a listing of that agent then that agent couldn't act as an exclusive buyer's agent for that sale.

WHO PAYS THE SALES COMMISSION DOES NOT DETERMINE AGENCY. In typical home-sale situations, the seller pays the sales commission to the listing agent. If there is a buyer's agent representing the buyer, that buyer's agent usually receives part of the listing commission when the sale closes.

The commission split is usually stated in writing in the local Multiple Listing Service (MLS) disclosure for each residence. Although this commission split it typically 50-50, it may vary if the listing agent (or the home seller) is especially anxious to give the buyer's agent a large sales incentive.

However, just because the seller pays the full sales commission doesn't mean both agents work for the seller. Although the listing agent clearly represents the seller, the buyer's agent represents the buyer even if the buyer's agent commission is paid by the seller.

A similar situation arises when a buyer's agent shows a "for sale by owner" home and the seller agrees to pay the buyer's agent half of a normal sales commission, typically 3 percent of the gross sales price. Although the commission money comes from the do-it-yourself seller, the buyer's agent still represents the home buyer rather than the seller.

In the rare situation where a buyer wants to purchase a "for-sale-by-owner" residence but the seller refuses to pay any sales commission, if the buyer's agent has a written commission agreement with the buyer, then the buyer would be obligated to pay the agent's fee.

THE BEST WAY TO FIND A GOOD BUYER'S AGENT. Although most real estate agents are eager to act as a buyer's agent, locating a top-quality buyer's agent is not always easy.

The best way to find a successful buyer's agent is to ask friends and business associates who recently purchased a house or condo. If they recommend their buyer's agent, he or she is probably worth interviewing.

Because the drawbacks for a home buyer not having a buyer's agent can be costly and because it usually costs the buyer nothing extra to have his or her own buyer's agent, smart home buyers spend considerable time and effort finding a savvy buyer's agent.

But home buyers should be very cautious about signing a buyer's agency contract unless the agent came very highly recommended. For this reason, signing a buyer's agency contract exceeding 30 days is usually a major mistake.

SUMMARY: Just as most home sellers have their own listing agents, smart home buyers understand the benefits of having a buyer's agent represent their best interests in a home purchase. Buyers who allow the seller's listing agent to act as a "dual agent" for both parties are creating an inherent conflict of interest for themselves. For more details, please consult a local real estate attorney.