Several years ago it was pretty easy to buy a home with no money down. Even as recent as the fall of 2007 when the subprime mortgage market was really having problems Fannie Mae and Freddie Mac both had several types of loan programs that allowed for 100% financing. These programs are called MyCommunity Mortgage, Flex and Home Possible and they still exist today, in 2008. However, you cannot use them right now to buy a home with no money down in most areas of the United States. The best you can hope for is 95% financing from Fannie and Freddie, even if you use their 100% financing programs.
Fannie and Freddie have both implemented a 5% cushion on their loan programs that go to 100%. Let’s just say that you are buying a home for $200,000. With the new underwriting rules you will only be able to borrow $190,000 or 95% of the sales price.
No More 100% Financing For Buying A Home In 2008
Why is this? Why it is so hard to use these programs to purchase a home with no money down is because Fannie Mae and Freddie Mac do not want to insure or guarantee 100% financing loans while property values are going down. They do not want to set themselves up to lose money. They know full well that in a declining market they would not get their money back if they had to foreclose on a property in the case of a mortgage payment default. If you think about it, would you want to give someone $200,000 to buy a home knowing that in 3 months, for example, that the property value would then be $190,000? That’s right you wouldn’t?
With all of this going on in the mortgage and real estate markets where does that leave a home buyer who has little or no money to put down? If you fall into this category can you buy a home? The answer is yes. Until home values stop going down you can still buy a home with no money out of your pocket by using an FHA Home Loan. FHA has not changed its guidelines to account for a declining home value market.
FHA allows for 97% financing not 100%. But what FHA allows for is all of your down payment to come in the form of a gift. Keep reading and we’ll discuss what a gift is. While Fannie Mae and Freddie Mac will also allow your down payment to come in the form of a gift using the MyCommunity and Home Possible programs, they are going to limit you to 95% financing while housing prices continue to fall.
Using Gift Money To Buy A Home With FHA Financing
With respect to buying a home, a gift of money for a down payment or closing costs can come from a relative like a parent, or sibling. In the case of buying a home in a declining market, a gift can come in form of seller assistance that covers your down payment and closing costs. It is true that you can negotiate with the seller to have them give you what we call in the mortgage and real estate world seller assistance. Typically you are allowed up to 6% seller assistance. So for example if you are buying a $200,000 home the seller can give you up to $12,000 towards your down payment and closings costs.
With FHA you as the home buyer have to show that you have 3% of the sales price for down payment to qualify. In the above example that would be $6,000 in the bank. With FHA allowing for a gift, there are several companies that that are the go between in between you and the seller. If you are going to use a down payment assistance program like Ameridream or Nehemiah the seller will give these companies part of the money that you are supposed to be getting from the seller. Of course they don’t really give it to them, it is a paperless transaction, but rather it is given to them and then turn around and “gift it” back to you. With it coming as a gift, then it counts as your 3% required money to be in the bank to prove for either down payment or closing costs.
This gift program is helping many first time home buyers and other types of home buyers purchase homes by getting all of the money needed to buy the home from the seller. Sellers are willing to give so much towards a buyer’s closing costs if they are motivated and want to stay ahead of all the other home sellers out there.
There are more resources on GetPreQualified.com for First Time Home Buyers.
Article by Dale Stouffer, Mortgage Broker. Dale has been in the mortgage business since 1996.
Home Buying For Dummies
This Article is designed to be of general interest and should not be considered professional advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal insurance and or legal adviser.
