Speaking of FHA loans… There are still Buyers out there purchasing homes with basically no money down - or very little money, anyway.
You can do that with an FHA loan - a typical FHA loan is at 97% of value, or 97% LTV. This means that the Buyer has to come up with a 3% down payment, plus another 2-3% typically in closing costs.
But - it’s possible in this market to negotiate an offer where the Seller pays for the closing costs AND the down payment by using a 3rd party gift program, usually a program like AmeriDream or Nehemiah.
Using a program like AmeriDream, the Seller ‘donates’ 3% of the sales price to the AmeriDream program, who then ‘gifts’ it back to the Buyer as their down payment. The Seller can then also contribute towards the Buyer’s closing costs - typically, we’ll ask for about 3% for that too.
The AmeriDream type programs are being contested by HUD, the people who insure FHA loans, because “data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments,” as the commissioner of HUD said in a speech. But for the moment, assistance programs are still available.
Couple of things to bear in mind - a few cautions:
- Homes bought with FHA loans have to be in reasonably good condition. Don’t expect to buy a fix-up home with an FHA loan.
- You might not be negotiating too much on the sales price, as you’ll be getting a 6% discount because of the Seller contributions, even if you pay full price.
- And forgive me for being a bit blunt here, but for some, not being able to save any money for down payment and closing costs is a sign that they’re not ready for the financial responsibility of owning a home.
- Especially in a soft or declining market, plan to stay in the house for several years, as you’ll need a good bit of time to build equity so that when you go to sell the house, there’s enough equity to cover the loans and costs, and still have enough left over to use as a down payment on the next home.
