Buying A Home With No Money Down

Buying a home with no money down has become easier than ever. Unfortunately, it has also become more necessary than ever, thanks to ever-falling savings rates. With that in mind I would like to respectfully suggest that if you need to buy your home with no money down, you may have a more general problem with your finances that needs to be worked on. In any case, there are times when it makes sense to have a lower or non-existent down payment, so let's look at four ways to accomplish this.

1. Have the seller finance part of the deal. For example, if you can get a mortgage loan for 90% of the purchase price, and the seller lets you make payments on a second mortgage note for the other 10%, you have a no money down deal - especially if the seller pays closing costs. Some sellers will be willing to do this if you pay full price or close to it. The lenders on the first mortgage may not agree to this, though, so ask them.

2. Get the seller to finance it all. Sellers need at least some cash, so how can they provide all the financing and still get cash? By creating two notes and selling one. Let's look at an example.

Suppose the seller is asking $220,000 for his home. He expects to get about $210,000 for it, and he needs at least $150,000 in cash to pay off his $130,000 mortgage and have a little left over. You offer him $240,000 for the home, in the form of two mortgage notes. The first is for $200,000 and the second for $40,000. As part of the deal, you have arranged for a "note buyer" to buy the first from him for $170,000. Now he has $170,000 at closing, plus you are making payments to him on the other $40,000, meaning he got the $210,000 he expected out of the sale. Of course, you had to overpay for the home due to the steep discounting ($30,000) on the sale of the first note, and you will have payments on both. In other words, there are only certain times when this technique will make sense. (Certainly it would if you could rent a property for more than the two payments and other expenses added up to.)

3. Borrow the down payment on your credit cards. This is either a great way to get into more financial trouble or, if you handle it right, a good way to stop renting. If you can get a $95,000 loan on a $100,000 condo, for example, you only need $5,000 for the down payment. Why not get a cash advance on a credit card when there is a low-interest deal?

Since you can't "borrow" for a down payment according to many lender's rules, get the advance a few months earlier for a "vacation." Take a taxi downtown for your vacation and leave the rest of the money in your checking account until it is time to buy a home. A lender can't read your mind to know what your intent was, so this is legal, but is it unethical? First, I would like to remind you that lenders encourage you to take out unsecured loans for vacations and depreciating assets like cars and boats, while saying you shouldn't borrow for a down payment on a home that will likely go up in value. That may be unethical. Playing by the rules and repaying everything you owe is not unethical.

Just be sure that you have a plan to quickly repay the credit card balance. For example, if you commit to using $2,000 of your tax refund to repay the balance, and otherwise paying $150 on it each month, you should have it paid in less than 2 years. If you can't do that, you are probably just creating more problems for yourself using this strategy.

4. Get a 100% first mortgage loan. There are still some lenders doing these (it is mid-2007 as I write this), and if the seller will pay closing costs, you won't need much cash at all. The catch? You will probably pay higher interest rates for these loans.

By Steven Gillman
Published: 10/15/2007