Purchasing A Home Using Someone Else’s Money

Despite the fact that homeownership rates in America have eased from record levels in the past ten years, still almost two-thirds of Americans own their own homes.  And the good news is that credit conditions are easing and with latent demand from the Millennial Generation, the numbers are expected to get stronger with regard to homeownership during the next ten years.

Fannie Mae has conducted several American home ownership studies in the past. Among other things, they measured the desires to achieve home ownership and the impediments to achieving these desires. One would think that the major impediments to purchasing a home would be not having enough income to qualify or poor credit histories. In reality, the number one obstacle to becoming a homeowner in America is lack of capital.

Knowing the significance of this obstacle, the industry has done much to make obtaining real estate “cash friendly.” While the surging economy provided much impetus for increasing real estate purchases, industry initiatives have really paved the way to facilitate the whole process.

In this article, we will highlight some of the ways a prospective home purchaser can obtain the capital needed to purchase their first home or even a move-up to a larger home.

Lower down payment programs–In the old days, the VA (open only to active military and vets) and Rural Housing Programs were the only no-down payment options and FHA had a minimal (less than 5.0%) down payment requirement. Then many conventional programs decreased their down payment requirements, however, this trend has reversed itself in the past few years. Today, the VA and Rural Housing Programs still offer no down payment options and FHA is still less than 5.0% down for borrowers with good credit. In addition, some state and local housing agencies have programs that will lend or grant the money for the down payment for qualified low-to-moderate income borrowers.  More recently, Fannie Mae and Freddie Mac have again offered 3.0% down options for first time buyers.

Gifts–Typically a gift from an immediate relative is allowed for a purchase transaction. In the past, only FHA and VA loans allowed what is called 100% Gifts. This term means that the total cash necessary for the transaction is allowed to come from a gift. Conventional programs typically required at least 3% to 5% of the money to come from the purchaser’s own funds–although there are some exceptions for programs for low-to-moderate income borrowers.

Seller Contributions–Some of the money needed for closing costs typically can be paid by the seller in a purchase transaction. On VA loans, the seller can pay all closing costs. On FHA loans, the seller can pay up to 6.0% towards closing costs–but require a small minimum from the borrower’s funds. On minimum down payment conventional loans, the seller can pay up to 3.0% of the sales price towards closing costs.  Recently FHA has proposed lowering their standard 3.0% as well.

Lender-paid closing costs–With the advent of more complex secondary market vehicles, lenders have been able to develop more sophisticated mortgage products. Some of these products lessen the cash needed to purchase by lowering or eliminating the amount of closing costs a borrower has to pay. For example, the purchaser can opt for a higher rate, no-point mortgage which in fact lessens closing costs. An even higher rate may mean that the lender can offer an option which will pay for additional closing costs associated with the home purchase. In effect, the purchaser is financing their costs through a slightly higher interest rate.

Not to be outdone, mortgage insurance companies have offered options which helped lessen cash requirements. Conventional mortgage insurance in the past required an up-front cash payment of more than 1.0% of the sales price. These new options allow the monthly payment to be increased and eliminates the up-front mortgage insurance cost. Another option increases the interest rate and enables the lender to pay the mortgage insurance directly (lender paid mortgage insurance).  These options may allow the mortgage insurance payment to be tax deductible as well, though you are advised to speak with your tax advisor before making this determination.

Loans–Most programs allow the purchaser to borrow the money needed to purchase if the loan is secured against an asset. Some programs, such as VA, might even allow unsecured loans for this purpose.  The most common asset used for this purpose is a purchaser’s retirement account in cases in which the account allows the owner to borrow against the asset.  Additionally, if no payments are required on the loan, this adds another benefit because additional income may not be required for qualification in this special case.

Interested in purchasing a home with the minimum cash required? Contact us for more details regarding these alternatives.