No-money-down home buying
In this difficult economy where stock valuations are
questionable, one of the best investments is real estate.
But for many potential buyers, the problem is coming
up with a down payment to make this all-important purchase. This
should not be the case. It is possible to buy a home with nothing
down, meaning no down payment.
There are several methods by which eligible home buyers
can minimize or even eliminate down payments. They include:
- VA loans
- Owner financing
- House trading
- Job-related federal programs
- State and local government programs
The method of purchasing a home with no down
payment that most people are familiar with is through the Department
of Veterans Affairs, or VA. This benefit is available to active
and retired members of the military service, veterans, POW's and
MIA's and their unmarried widows. All branches of the service including
the Coast Guard are eligible. Also members of Selected Reserves
or National Guard who have completed six years may be eligible along
with many with WW II service from the merchant marines, military
academies and others pulled into service for the war effort.
Many older veterans may recall a time when they were
entitled to use this benefit only once in their lifetime. This was
changed in 1989. Now, the only existing stipulation is that an eligible
person may use this benefit on only one house at a time.
As with all VA loans, the house must be used as a
primary residence. It may not be a rental home or second/vacation
home. There is no maximum home loan amount.
Nothing-down VA foreclosures available to everyone
What many people do not know is that you do not have to be
a veteran to purchase a VA foreclosure with nothing down. VA foreclosures
are available to the general public. Some require nothing down or
just a fee of $500. Although the homes are sold from the VA, purchasers
must obtain conventional or FHA loans unless they are veterans or
VA foreclosures with nothing down or $500 fees can
be found among those from banks, lending institutions and federal
agencies on Bankrate.com.
Owner financing, lease-purchase
If a glut of unsold homes develops in a market, some sellers
-- especially those in a hurry -- become willing to assist the buyer.
There may be additional pressure on sellers of used homes when they
compete with builders in their areas who fund down payments on new
homes. These sellers may agree to lease-purchase or owner-financing
plans. In both cases, purchasers do not pay down payments to acquire
Although they allow a home buyer to purchase a home
with no money down, these programs can be good and bad for the purchaser
and should be approached with caution.
As with any legal transaction, you should use a standard
legal form. Lease-purchase forms are obtainable at most major office
supply stores. Owner financing contracts are not readily available
and will have to be drafted by an attorney.
In the case of lease/purchase agreements, the seller
agrees to a price that he will sell the house for at some future
date and the buyer usually pays a monthly amount several hundred
dollars more than what the home would receive as a rental. Depending
on how the agreement is written, this additional money can be a
"down payment" savings plan.
A portion of the additional money can be returned
to the buyer when the house is sold and used as a down payment.
If the buyer decides not to buy the house, all additional moneys
are forfeited. If the buyer decides to complete the transaction,
he or she would secure a mortgage from a lender. These arrangements
are similar to those in owner financing except in that case the
seller is the lender.
There are two areas of concern for the buyer with
these types of purchasing options. In both cases, because the buyer
is not paying a mortgage company he does not receive any of the
tax deductions for the interest on the house payments. This may
be an acceptable trade-off for the ability to purchase a home without
a down payment.
The second area of concern requires more judgment.
Because the buyer is paying the seller each month instead of a mortgage
company, if the seller were to go bankrupt or lose the home in foreclosure,
the buyer's entire investment might be lost.
But on the flip side, there have been several occasions
where persons have entered into lease-purchase agreements and then
found purchasers for the homes at amounts much greater than the
selling prices contractually agreed upon. The lessees bought the
houses from the sellers and then resold the houses for a large profit
in the same day.
House trading, lines of credit
Many professional investors acquire homes with no money
down by trading one property for another. In some cases, they trade
one large property for several smaller rental properties. Or they
trade houses in different cities to acquire a vacation or retirement
home. Property trading is also a legal way to avoid the capital
gains associated with selling a property.
Another way to acquire a property with no money down
may be with a line of credit secured by the equity in another property.
This allows the homeowner to purchase another property using the
accumulated equity in a home without selling the original property.
The Office of Housing and Urban Development (HUD) offers
special financing for first-time home buyers. This program is based
upon need and is designed to allow low-income families to obtain
their first home without a significant down payment or closing fees.
Also, many HUD foreclosure homes require no down payments.
Job-related federal programs
The federal government also has programs to help farmers
and police personnel acquire homes with nothing down.
For those with limited income who wish to live in
rural areas, the Rural Economic and Community Development Administration
offers farmers home loans with nothing down.
Monthly payments may be subsidized and the interest can be as low
as 1 percent.
To encourage police to occupy homes in crime-targeted
areas, special federal programs permit police officers to purchase
homes in selected areas with nothing down. Information is available
to law enforcement officers through their places of employment.
Some states, counties and cities offer
programs that can eliminate down payments. Often, prospective home
buyers must meet income requirements, hold certain jobs, be a first-time
buyer or agree to buy in a specific area. It can take some sleuthing
to find such programs. Start with your state's
housing agency. Your county or city also may have a housing
With so many methods available to obtain homes with
little or no down payment, the goal of homeownership should be achievable
by almost everyone who desires it.
Zimmerman is the author of How
to Retire With a Million Dollars and the president of foreclosuresUS.com,
a partner of Bankrate.com.