No-money-down home buying
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 program
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
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 active military.
VA foreclosures with nothing down or $500 fees can be found among
those from banks, lending institutions and federal agencies.
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 the properties.
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
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
housing agency. Your county or city also may have a housing agency.
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.
Elaine Zimmerman is the
author of How
to Retire With a Million Dollars
and the president of
-- Posted: July 1, 2003