Buying Properties Using Traditional Financing With No Money Down

Many people feel with the current lending squeeze going on today WRT lending institutions, no money down deals are no a thing of the past. I'm not talking about creative financing deals, such as Subject-to investing, but getting loans from a bank or through a mortgage lender.

I explained how this was possible using my latest purchase, and I thought it was such a big deal I wanted to elaborate more on the topic.

First things first, I want to warn the reader that this particular approach does come with some constraints. IOW, it isn't something that you can just walk into a loan officer's office and say you want and you'll get. The kind of loan I'm talking about is through the USDA. Yes, the United States Department of Agriculture. Huh?!?! Did you just say Agriculture? Yes - I did.

It turns out the government loan arm isn't just specific to HUD, FNMA, FMAC, and so on. They also are in the business of loaning money to folks to expand rural regions of the country. This particular lending is backed by the USDA. You can read a lot more about it on their web site.

Besides the usual hoops one must go through with both qualifying for a loan and qualifying for a government backed loan, there are some requirements set forth by the USDA in order to get their particular loan. One of the first and foremost is where the subject property is located. Again, the whole idea behind the program is to expand growth in rural regions of the country. So someone's first thought would be a farmhouse in the middle of country surrounded by endless cornfields. Perhaps, but surprisingly, even homes that are in established communities could qualify. For example, the house we bought is in a town called Pflugerville, which is a rather large city in the greater Austin metro area. However, just across the street from the subdivision the property is located is another subdivision that does not qualify. Your loan officer will need to run a report on the property in order to see if it will qualify or not.

There are also a confusing list of constraints you must go through in order to qualify even if the property itself qualifies. Many of these things almost killed our deal, such as an income limit, distance from work vs. where you currently live (I did say confusing), it cannot be in the same "area" you currently live, and so on. Check with your loan officer to get a complete list. Just be advised that even he/she may not be able to fully understand all the quirks of the program.

Now the good side about getting a USDA loan ...

At this point you may be saying, "Geez - why bother if you have to go through all these hoops! I can get a property financed with an FHA loan with only 3.5% down without all these headaches." True, but the real beauty of a USDA loan is the fact that they can loan you up to 102% of the appraised value of the property. Note: I underlined "appraised", because it is NOT the purchase price. This is how you can get into a home with $0 down - and I'm talking a TRUE $0 down (no down payment, no closing costs, no prepaids - nothing).

Note: With all government loans, they charge a fee. Without my paperwork in front of me, I believe a USDA loan charges a 1.5% fee.

For example, suppose you find a home that qualifies. It's listed for $150,000, but is worth $160,000. Closing costs and prepaids total $6,000. If you were to get an FHA loan, you would have to come to the table with $6,000 + 3.5%, or a total of $11,250. Even with a VA Loan (another 100% type of financing available to US Veterans), you would still have to come up with the $6,000. Since a USDA loan uses the aprraisal value vs. the purchase price, here is how it would work:

Appraisal: $160,000
Maximum Loan: $160,000 * 102% = $163,200
Purchase Price: $150,000
CC's + Prepaids: $6,000
USDA Fee: $2,250
Total Loan: $150,000 + $6,000 + $2,250 = $158,250

Since $158,250 is less than $163,200, you can come to closing with absolutely no money out of your pocket! Probably the first thing you may ask is "Can I get a loan for $163,200 and walk away from the closing with $4,950 ($163,200-$158,250)?" The answer is: No. While a USDA loan can give you 102% towards the appraisal price, they will cap the loan at the amount required to pay for the property, closing costs, prepaids, and the fee.

Another bit of advise is this ... If you are forced to put down ANY money on the deal - for instance, earnest money deposit - that will be deducted from the proceeds at closing and you WON'T get it back. This happened to us, and we found out the hard way. So, try to find a Seller who is willing to request a low (or no) earnest money deposit up front.