Down Payment Assistance: Buying FHA With No Money Down Doesn't Require 100% Financing!

| | Comments (0)


NOTE: Congress enacted new legislation which killed these programs in April 2008. I am leaving this up because I did write it, but it is no longer applicable


Somebody who's only looked at the specifications for the FHA purchase program will ask me if I'm on drugs. The answer is yes, I have taken my allergy medication today, but there really are ways to purchase a property through the FHA with no down payment, as I have recently discovered.

This is not the same thing as 100% financing. The FHA doesn't do that. The FHA really wants borrowers to have some of their own money invested into the property. In fact, they have supposedly made it very plain they don't like down payment assistance programs and using them can involve additional scrutiny - but the FHA will accept them if they're done right, meaning that some people are able to buy who would not otherwise be able to.

Here's what the legislation says: The FHA will allow the seller to assist the buyer with up to 6% for closing costs only. No seller carrybacks, and no cash back from seller to buyer (which is fraud, anyway). The owner cannot give the seller the down payment.

But the FHA allows up to a 6% gift for the down payment, and this can come from either immediate family members or from non-profit organizations. If your family members, usually parents, can come up with a gift - not loan - to enable the purchase of a property, that is acceptable to the FHA. Non-profit organizations may also do so. Indeed, there are non-profits that make it their primary activity to do so.

Here's the way it works. The owner (seller) of a piece of property agrees to furnish an amount of money equal to the necessary down payment assistance plus a certain small fee, but does not actually send any money until the transaction closes, at which point escrow is given instructions to . The down payment assistance non-profit then advances the money into escrow, with appropriate contingencies. When the transaction funds, escrow sends the money back to the non-profit for use with the next assistance client down the line.

This is just far enough from direct cash back that the FHA will sign off on it, and most lenders doing business with them will as well. Everything has to be disclosed to everyone - if you're ever involved in a transaction where somebody wants to keep some aspect a secret from some other participant, run away before it happens, or disclose it to them yourself. But there is a difference - a registered non-profit third party, and they are advancing actual cash even though they haven't received any yet. Furthermore, the buyer is not getting cash - what they are getting is money to make a down payment with. This changes the transaction enough that the principles that say cash back is fraud no longer apply, because it isn't cash back from the seller to the buyer.

These grants are in no way, shape or form free money. They come with extensive strings attached. They are an effective way to leverage the current market to make purchasing now, while the market is in the favor of buyers, possible, even for someone who may not have a down payment. Nor do they require repayment.

Why would an owner agree to do this? Two reasons: Price and saleability. First of all, owners who are willing and able to do this have the capability of selling to buyers that other owners do not. This makes the property unique in a way, and provides negotiating leverage because most owners are not willing and able to do this. Instead of eighty properties, a given prospective buyer may only have a choice of three properties. Now their property only has to compete against two others, and those others might not be suitable. The result is quite possibly that a given buyer does business with you or with nobody at all. Now they don't really have the opportunity of walking away from your property. You think maybe a competent listing agent could get significantly more money out of the buyer in such circumstances?

Furthermore, the price the owners might be willing to accept obviously gets raised. If they might accept $400,000 without one of these programs involved, but they have to furnish 3% for closing costs plus 3% for a down payment and $500 for a fee to the non-profit, they need $426,100 just to get the same gross revenue. When you consider that they're paying commissions based upon the higher number. At 6% total agency commissions, that adds over $1500 to what the owners are paying in commission, plus about $60 for owner's title insurance, $30 in lender's title insurance, and roughly $30 extra for each side for escrow, in this case. Your point of equivalence between this prospective buyer is about $427,700, as opposed to a generic buyer at $400,000, but it's very possible to get more than a breakeven amount - not to mention selling the property, where you wouldn't have otherwise.

I have to mention appraisal issues. It doesn't help if the appraisal is below the purchase price, particularly for high value financing. However, this is one area where the factors working to push everybody towards the FHA loan also work in your favor, because due to the decline in prices that has the lenders in full on PANIC! mode, appraisals are generally fairly easy to justify above the purchase price. I've had to ask them if they could hold the value down a couple of times of late. I don't remember the last time an appraisal didn't come back with plenty of value on a purchase.

Another note is that it doesn't necessarily have to be an FHA loan to work with one of these programs, but the fact that the FHA is willing to work with these programs takes away a lot of lender anxiety, because the FHA guarantee is the only thing that has lenders willing to go 97% loan to value ratio at all in most of the country. Once the FHA signs off on the whole transaction, that guarantee eases lender fear, because otherwise the lenders are stopping at 95% or less. So it's going to be a rare lender that agrees to all of this without the FHA being involved.

Finally, it should be obvious that buyers would be better off to come up with a down payment themselves, rather than pay the higher price, especially as we're specifically considering a loan for 97% of value. The higher property taxes, the higher purchase price, and definitely the higher loan amount are all going to be something you have to deal with for basically the rest of your life. The seller gets their money, where it all comes out in the wash, and goes their merry way. The buyer is paying a higher price, more taxes, increased cost of money, has to deal with a higher loan to value ratio if they need to refinance, and will net less money if and when they go to sell. In the example given, I'd much rather come up with $12,000 cash for a down payment than have to deal with a purchase price $15,000 higher (remember it was 3% closing costs plus 3% to the down payment program, so half of $30,000), pay an extra $200 per year in property taxes, an extra $900 per year interest, and end up with $15,000 less money in my pocket if and when I sold. Wouldn't you? But none of this takes place in a vacuum, and if you wait until you can save that $12,000, the conditions at purchase are very likely to be even worse - because right now the market is in the tank, and buyers have more power and properties are likely to be more affordable than they ever will be again. If you can save $500 per month, by the time you are ready to buy it will be two years in the future, and I'm expecting the prices of properties selling for $400,000 now to be significantly higher than $415,000.


Caveat Emptor

Categories

Delicious Bookmark this on Delicious StumbleUpon Toolbar Stumble It!
Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites) All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

Leave a comment

Copyright 2005-2020 Dan Melson All Rights Reserved

Search my sites or the web!
 
Web www.searchlightcrusade.net
www.danmelson.com


The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover

The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need To Know About Buying Real Estate Cover

Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read

The Man From Empire
Man From Empire Cover
Man From Empire Books2Read link

A Guardian From Earth
Guardian From Earth Cover
Guardian From Earth Books2Read link

Empire and Earth
Empire and Earth Cover
Empire and Earth Books2Read link

Working The Trenches
Working The Trenches Cover
Working the Trenches Books2Read link

Rediscovery 4 novel set
Rediscovery set cover
Rediscovery 4 novel set Books2Read link

Preparing The Ground
Preparing the Ground Cover
Preparing the Ground Books2Read link

Building the People
Building the People Cover
Building the People Books2Read link
Setting The Board

Setting The Board Cover

Setting The Board Books2Read link

The Invention of Motherhood
Invention of Motherhood Cover
Invention of Motherhood Books2Read link



The Price of Power
Price of Power Cover
Price of Power Books2Read link

The Fountains of Aescalon
Fountains of Aescalon Cover
The Fountains of Aescalon Books2Read link



The Monad Trap
Monad Trap Cover
The Monad Trap Books2Read link

The Gates To Faerie
Gates To Faerie cover
The Gates To Faerie Books2Read link
**********


C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
-----------------
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?

Aggregators

Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines



Powered by FeedBlitz


Most Recent Posts
Subscribe to Searchlight Crusade
http://www.wikio.com

About this Entry

This page contains a single entry by Dan Melson published on February 29, 2008 7:00 AM.

Consumer Focused Carnival of Real Estate was the previous entry in this blog.

Links and Minifeatures 2008 02 29 (Leap Day) is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

-----------------
Advertisement
-----------------

My Links