Do You Really Need a Down Payment
to Buy a Home?
If you don't have a down payment to buy a home, there may be other options
available to you. If you're a first-time homebuyer, it can be an overwhelming task to save
the money needed to make a sizeable down payment. In most areas of California and in many
other parts of the U.S., real estate values are appreciating faster than the average working
person can save for a significant down payment. Lenders are now offering an unprecedented
array of loans with 100% (or more) financing options with very attractive rates and flexible
credit and income guidelines, so having to come up with a down payment is becoming a thing
of the past.
This is not to say that 100% financing means that there's absolutely no cost to the
borrower. In most cases, you will still need some money to cover some closing costs plus
the cost of an appraisal. If you want to have your property taxes and insurance included
in your monthly payment (known as an "impound" or "escrow" account),
you will also need a certain amount of "reserves" of these monthly costs to be
deposited with the lender at close of escrow. 103%, 104% and 107% financing provides additional
funds to the borrower that can be used to offset non-recurring closing costs (other than
taxes and insurance). Also, a seller may agree to pay a certain amount of your non-recurring
closing costs in escrow as part of the transaction.
No down payment?
An alternate means of purchasing real estate with no money down is to adjust the purchase
price upwards to match the estimated closing costs. This requires two things to work: (a)
the seller must be willing to adjust the price up, and (b) an appraisal of the property
must support the increased value.
We're not talking about over-inflating the real value of the home by a large amount.
The purchase price of California properties in high-value areas can be adjusted upwards
to some degree and still be within an acceptable appraisal range. In such cases, the seller
can refund the difference between the minimum accepted sales price and the adjusted price
to the borrower to use towards closing costs, reducing the amount of cash necessary to
close escrow.
"Gifts" versus Down Payments
Younger people and many first-time buyers have relied on parents to offer substantial
financial help when making a down payment. The only catch is that lenders sometimes tend
to view help of this sort as a loan that only increases the borrower's indebtedness. You,
your spouse and your combined sets of parents may agree that the money is a gift, but a
lender may see it as an obligation that you and your significant other must pay, just as
you must pay your credit card bills and car payments. You may be asked to supply a "Gift
Letter." This is a letter from the donor(s) stating that the money is a gift to help
you buy a home and that you are not required to pay it back. Different lenders have varying
guidelines for accepting gift funds of less than 20% of the purchase price, so be sure
to inquire beforehand if a relative is only gifting 5%, 10% or 15% of the down payment.
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