Financing

Zero down payment mortgages

A decade ago one could buy a house without having to put any money down. But how times changed in the aftermath of the housing crisis and Great Recession. In today’s market, zero down mortgages are few and far between. However, there are several notable options.

#1) VA— these zero down mortgages are available only to qualified veterans.

#2) RD (or Rural Development)— as the name implies, these mortgages are available only on properties that are outside big city limits.

#3) Indiana Housing— these mortgages may be used anywhere; although they are available only to first time home buyers except in certain targeted counties.

To see if you might qualify for one of these zero down loans, just ask! I’ll be happy to get you answersor to point you in the right direction!

Why does it matter where my money comes from?

That’s a question I get asked by wide eyed, bewildered clients when their loan officer tells them they have to prove where their down payment money is coming from. They ask, “Why does it matter? Why should they care?” Well, let me see if I can shed some light on the situation…

First of all, the minimum amount of cash down payment required varies with your loan type. VA and RD loans do not require any down payment from the buyer. FHA requires a minimum of 3.5% of the purchase price (ie. $3500 on a 100k property), and Conventional loans require 5%. There are a couple exceptions to those rules, but they don’t factor in very often. And keep in mind that closing costs typically run around $4-5000; and someone has to pay those- either the buyer or seller. They are a negotiable item.

On VA, RD and FHA loans, the buyer can use their own money or they can receive a gift from a relative, employer or (in some cases) a close family friend. To use the gift money, the person giving the gift must sign a form called a “Gift Letter” where they affirm that the money is their’s and being given as a gift (ie. no repayment is intended). They also must supply a bank or investment account statement evidencing that the money is their’s. For any other funds the buyer is using to pay down payment or closing costs, they’ll have to prove where the money came from (unless it was in the bank or an investment account for the past 60 days).

On Conventional loans, anything above the minimum 5% required cash down payment may be gift funds. And like on the other loan types, the source of the funds will have to be verified unless it was in the bank or an investment account for the past 60 days. (Read that last sentence again- carefully. It can be a deal breaker.)

On Contract deals, the source of funds does not usually have to be proven.

So, why does it matter? Basically, there are two reasons why the lender wants to know where the money is coming from. First, it a general rule of lending is that borrowers who have some “skin in the game” have lower default rates than those who do not. Makes sense. I mean, if you’ve put some siignificant amount of your own cash into the deal, you’re less likely to give up and walk away from your investment. Secondly, the lender wants to know if you’ve borrowed money to come up with the down payment or closing costs. This makes sense as well. If you’ve borrowed money, then the amount that will need to be repaid each month should be taken into consideration when evaluating your debt-to-income ratio to see if you qualify for the loan.

There are a lot of things in the mortgage business that don’t make sense. These requirements, however, do help the whole system to function better— and in the end, that is good for home owners.

If you have questions about your own situation, please call. I’ll be happy to help you find your way through the mortgage maize!

How to win bids on foreclosures

People hear stories about friends and co-workers winning bids and getting foreclosures on the cheap. So, they’re naturally interested, and think that might be a good path for them to go. But when they ask questions or go online to try and figure out how you actually bid they get really frustrated. And then sometimes after they make losing bids on 3-4 houses they get really frustated.

Hey, I can understand all of that. So, I’ll share a little of what I’ve learned from the school of hard knocks. First of all, understand that online bids are run differently by everyone doing them. Most of the government entities (HUD, Fannie Mae, Freddie Mac, VA, USDA) have online bidding, and they all have their own variations. Ditto for many of the major banks and investment companies. And then there are the true auction companies who run their own bids. (I’ll save discussing them for another time as they’re considerably different from all of the rest.) With all of those variations, forgive me for having to double check the bidding specifics from time to time. I want to get it right for my clients, and keeping tabs on all of those variations (which change from time to time) would be a full-time job in itself.

Ok, the BIG question, how much do you have to bid to win? Come on now, if I had a crystal ball I’d be a billionaire. With maybe one exception, the bids are all sealed. In most cases I make the bids online (at the request of and for the benefit of my clients). The bidding is sealed so no one knows what’s been bid before or after I place my client’s bid. 6-7 years ago, the lenders offering their foreclosures for sale by bid had them priced much higher than the market was willing to pay, and they would oftentimes settle for bids substantially lower than their initial asking price. By substantially, I mean 10-20% less. However, in recent years they’ve sharpened their pricing models and now most bids are won somewhere between 92-110% of the asking price. You can bid lower than that, but in most cases it’s an exercise in frustration, a waste of time. How do you know what bid will win? Well, you don’t. The best you can do is “guesstimate” how fairly the property is priced compared to others on the market (considering location, size, condition, needed repairs, etc.) and how many other people are likely to be bidding on this particular property. The more people bidding, the higher the winning bid is likely to be. (Btw, I’m happy to help you sort all of that out and come up with the best bid!)

Now, understand a couple things, lenders evaluate the bids on net price. So, yes, you can have the lender pay your closing costs (let’s call them $4000 for talking sake) but the lender is going to evaluate your bid (say $100,000) as 100-4 = 96. And if someone else bids $97000 with no seller-paid closing costs, then their 97 will trump your 100 (because it only nets the lender 96). Another thing, if you’re using FHA financing (3.5% cash down payment) and bid above the lender’s initial asking price on a HUD home, well, you’re going to have to bring the amount bid above the initial asking price to closing in cash. So, if HUD is asking 100 and you bid 105, you’ll not only have to bring your 3.5% ($3500) but the $5000 excess (105-100) to closing. that would then be a total cash outlay of $8500 (3500 + 5000) plus any closing costs you were paying (which could make for an additional $4000 cash outlay). As they say, the devil is in the details. I’ll do my best to help keep you on the right path. Just be sure to tell me in clear terms what you want and what you’ve got to work with. We’re a team, and if you don’t see it that way please go waste someone else’s time!

Now, after doing many dozens of different bids, I’ve picked up a few tricks that help my clients have a strong batting average when it comes to winning online bids. If you’re interested in learning more, give me a call (317-625-0655).