Steve Rath - Sacramento Area Real Estate

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Buying a Home with Little or Nothing Down

by Ralph Roberts

Few goals in life surpass buying a home. But there's a myth that's been going around for years that probably has stopped many people from fulfilling their home-ownership dreams.

Conventional wisdom says it takes planning, discipline and enough money for a large down payment to qualify as a home buyer. As a result, many people save for years to accumulate a sufficient entry fee into the home ownership club. They think they're making a sacrifice that will allow them, later on, to enjoy the pride of home ownership while keeping the purchase affordable. This "common knowledge" is not necessarily true.

Personally, I feel that people who want to own homes should be able to do it. For the most part, almost anyone can own a home without a long wait.

How? There are some concrete steps one can take to get into home ownership without years of struggle and delay.

First, find a buyer-broker to represent you as a buyer. Real estate agents generally represent the seller; consequently, it is impossible for an agent to seek the best possible deal for the buyer and the seller at the same time. A buyer-broker, who has no relationship with the seller, works exclusively for the buyer and, therefore, finds the best possible price and payment plan for the buyer. As a buyer, you need someone on your side who understands all of the financing alternatives available.

A knowledgeable broker has a number of ways to guide someone into a home who hasn't saved $10,000 as a down payment on a $100,000 house.

Every year there are countless numbers of homes put on the market that are potential bargains. These can be foreclosure sales or homes that require repairs.

Have your broker check out Veterans Administration (VA) home foreclosures that are listed in the newspapers every Sunday (but usually are snapped up quickly). Although you have to act quickly to tap into this market, it represents a great opportunity to buy with zero down.

Banks with foreclosures will sell off those properties at bargain prices with small down payments. Since their business is lending money, not property ownership, it can be more practical to take a loss or even provide up front money to a buyer to finance needed repairs. Banks would much rather have the capital produced from a sale than the house itself on their books.

Your best option may be to lower your sights and work up to your dream house. Instead of paying rent for three years while saving for a down payment, buy a "transition" house that you can afford now. The money you spend on rent can be helping you accumulate equity in a home -- equity that can go toward the down payment on a larger home when you are ready to move up. Saving too long for a large down payment can actually cost you more money in the long term.

Consider a home in today's market that's selling for $90,000. A buyer with $5,000 decides, "I'm going to wait until I have $10,000 for a down payment."

If the house increases in value 2 percent each year, in two years that house will be worth about $94,000. If the mortgage interest rate has increased from 8 percent to perhaps 10 percent by that time, the buyer not only will have to spend $4,000 more for the same house, but -- assuming a 30-year mortgage -- will have payments that are $110 higher each month. Plus, the buyer has foregone two years of tax write-offs by waiting.

A lease-option can give a potential buyer a taste of home ownership without being locked into a mortgage. This choice leaves the buyer time to qualify for a mortgage, a chance to decide if the house is a good fit, and a potential financial windfall.

For example, $5,000 down on a $100,000 home would leave $95,000 to be financed at the end of a two-year leases-option. If the home had increased in value to $110,000 at that time, the buyer still would only owe $95,000. Lease-options can be even structured so a portion of your monthly lease payments goes toward the principal on the house -- you can build equity while paying rent.

Even people with questionable credit ratings have options. Some lenders specialize in mortgages for people with less than perfect credit. If you have a blemished credit report, but enough income to make payments, this type of program can provide a home loan as well as an opportunity to reestablish good credit.

Here are some additional ways to find money for a down payment:

Borrow against a 401 (k) plan, a pension plan or an insurance policy;
Use another asset you have as collateral for a loan. For example, if your car is paid in full and is valued at $10,000, you could get a $6,000 loan against it, then use that cash for a down payment;
Have a blood relative give you a gift of cash, or one that converts to cash;
Persuade the seller to carry a second mortgage. A motivated seller may be willing to loan the buyer all or a portion of his down payment. The buyer then begins paying back the down payment to the seller at the same time he starts making mortgage payments;
If the seller is motivated, ask him to pay some of your closing costs. In some cases the seller can pay as much as 6 percent of closing costs. You would gain twice in this arrangement because a legal loophole would allow you, the buyer, to use these costs as a tax write-off. Different lenders, however, do have restrictions, so carefully discuss the details of this option with your Realtor;
Finance the sale through a land contract, known in some states as a trust deed. This private agreement between the buyer and seller often requires a zero down payment. While the interest rate is usually a few percentage points higher than a conventional mortgage, a homeowner can refinance into a mortgage, sometimes as soon as a year after the initial sale.

And, don't forget about conventional mortgages with a little help from the government. If your income is below the existing ceiling, you can qualify for a community home loan. Generally, such loans require about 3 percent down. That would put an $80,000 home into the hands of a buyer for about $2,400 down. Rates and ceilings vary by community; contact your broker for details about what's available in your area.

Perhaps most importantly, don't expect a real estate transaction to be perfect. If you think you'll regret a decision down the road, you probably will. But, you'll also deprive yourself of the enjoyment and perks of home ownership in the process by waiting for things to be just right. The best time to buy is now. If you currently pay more than $400 a month in rent, there's no reason you can't fulfill the dream of home ownership right away.