Real estate Q&A: “How to buy real estate with no money down?”

It used to be easy to buy real estate without putting a penny down, but after the real estate boom turned to bust, most of those options slipped away.

However, there are still a few programs out there that offer 100% financing, sort of…

USDA Zero Down Loan Program

One of the few remaining zero down loan programs comes from the United States Department of Agriculture (USDA).

While it is reserved primarily for low-income individuals and households, you can have an income up to 115% of the median for the area.

The property must be “modest in size, design, and cost,” and borrowers must have “reasonable credit histories.”

In other words, it’s easy to get approved for a zero down mortgage from the USDA, assuming the property is located in a rural area, or at least an exurb.

The loans are typically 30-year fixed mortgages, and private mortgage insurance can be avoided thanks to a guarantee fee (which can also be financed).

Contact a loan officer or mortgage broker for more information on the program.

HomePath® by Fannie Mae

Government mortgage financier Fannie Mae also has a program called HomePath® that offers financing with down payments as low as 3%.

The kicker is that the down payment can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer.

In other words, zero down financing…and you can avoid paying mortgage insurance.

FHA Loans

It used to be possible to get an FHA loan with zero down thanks to seller-paid downpayment assistance, but now you need to put down 3.5%.

You also have to pay both an upfront mortgage insurance premium and an annual mortgage insurance premium.

While it’s not 100% financing, it’s pretty close and not a bad deal, considering most conventional lenders these days want 10% down.

So there it is – if you take the time to shop around you may be able to get that property you have your eyes on without breaking the bank.

Read more: How much should I put down on a house?

If you’re curious whether it’s the right time to buy that dream house, you may want to consider the local rents in the area.

There are plenty of advantages to renting, like no down payment, the flexibility to move, and lower monthly payments.

At the same time, buying a home means more space, tax deductions, and possible home price appreciation (is real estate still a good investment?).

But some cities just seem to be too overpriced, no matter how you slice it.

Even though home prices came down over the past few years, they only really dropped from inflated, unsustainable levels, so the discounts are dubious at best.

Last week, Trulia calculated the price-to-rent ratio using the average list price compared with the average monthly rent on two-bedroom apartments, condos and townhomes listed on their website.

They found that in many cities it’s still wise to rent rather than buy, because the associated costs are just too high.

Top 10 Cities to Rent vs. Buy

As you can see, renting in New York City is still the way go, as the cost of real estate is clearly astronomical. Surprisingly, the same is true in places like Omaha and Oklahoma City, meaning rents are still super cheap.

Remember, buying a home isn’t always the wisest move, but obviously your decision should go beyond price.

Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city.
Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city. The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation.
Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

Home sales have been softer than analysts have predicted, and it’s really no surprise.

Prices aren’t really that attractive, even with all the home price declines; affordability is only historically high because mortgage rates are at record low levels.

That’s one reason I don’t see mortgage rates rising anytime soon; wouldn’t want to dampen affordability, especially if nobody is buying to begin with.

Then there’s the fact that prospective buyers don’t have any money, as evidenced by a poll of both current home owners and renters, conducted for the National Association of Home Builders (NAHB).

About one-third of renters who responded intend to buy a home in the “near future,” but 39 percent said they don’t have the money to buy right now.  Uh oh.

Another 20 percent said they don’t think they can qualify for a mortgage, and 18 percent said job security is the greatest concern.

Oh, and 29 percent of current homeowners interested in buying a new home say their inability to sell their current home is the biggest obstacle.

There’s also the worry that the value of a new home might fall after the purchase is made, and many believe home prices are still just too high, even with that homebuyer tax credit set to expire in a couple months.

I for one, agree. That’s why I said there’s no rush to buy a home, still too much downside risk in my opinion.

I follow the real estate market pretty intently, and I’ve actually considered purchasing some real estate myself, given the fact that bargains are beginning to emerge.

But at the same time, I don’t think there is any rush whatsoever to purchase a property. I don’t think you’ll miss anything if you wait.

Sure, home prices have fallen significantly throughout the nation, and mortgage rates are at record lows. That’s all good news, but that still doesn’t mean it’s the right time to buy.

There’s also that homebuyer tax credit floating around, along with the move-up buyer tax credit, both of which are good until April 30, 2010.

Of course, it can be argued that the tax credit is artificially propping up home prices, so that’s essentially awash, if you follow that logic.

And the threat of mortgage rates rising is also less of a concern in my eyes because one of the main reasons home prices are so affordable right now is due to the ultra low rates.

Do you think the government would risk messing that up, given how fragile things are right now?

If they did somehow rise, home prices would probably fall to compensate, so again, no rush.

At the same time, the mainstream media will make it seem as if you need to buy now, before it’s too late; that there are once in a lifetime opportunities standing before you.

Just don’t forget about all that shadow inventory, or the fact that roughly a quarter of all residential properties with mortgages were in a negative equity position as of year-end.

If you do decide to buy right now, you may wonder when home prices will rise? Some think they won’t hit recent peak levels until 2020…

In other words, don’t expect that instant profit we all grew accustom to in the 00′s, when it seemed anything you purchased appreciated within months.

If you are interested in buying a home, consider taking a look at the most overvalued cities and the most undervalued cities in the nation.

Or perhaps the top investment property markets in the United States, because regardless of all the turmoil, real estate is still a good investment.  Just make sure you time it right…

Buying a home isn’t easy. There are a number of things that can and will go wrong, from the financing falling through, to the appraisal coming in low, to seeing your offer on that dream house get trumped by another buyer.

Adding to the difficult and sometimes competitive process is timing the transaction. Is now the right time to buy? Are home prices still falling? When will they rise?

While it’s nearly impossible to time your home purchase perfectly, there are a few things you can do to minimize your downside risk.

One tip I’d like to highlight has to do with functional obsolescence, which is essentially home price depreciation caused by a loss of building utility.

Specifically, if the property you purchase doesn’t look like the others around it, if may suffer in value.

You’ve probably seen a street in your neighborhood or somewhere nearby where one home stands out above the rest.

Perhaps it has been completely remodeled, or has features that aren’t the norm for the area; stuff like ornate marble pillars and/or a huge iron gate surrounding the property that make it look like the Taj Mahal.

Whatever it is, the home doesn’t look like the others, even though it may be much more aesthetically pleasing and seemingly more expensive.

These characteristics are known as over-improvements, because they’re too lavish for the surrounding area.

As a result, the property value will be dragged down by those nearby, because you’re only as strong as those around you.

Conversely, if you buy a property that isn’t as picture perfect as those close by, but the amenities are fairly similar, you should see a value boost as a result.

So keep that in mind if you’re thinking of buying a property or remodeling your current home (see best and worst home improvements).

Real Estate Q&A: “Who qualifies as a first time home buyer?”

With all the fuss about the first-time home buyer tax credit, you’re probably wondering if you’re eligible.

Well, the tax credit can only be used towards the purchase of a primary residence, meaning a home you actually intend to live in full time, no vacation homes or investment properties.

Additionally, you (and your spouse if applicable) must not have owned a principal residence in the three years prior to purchase to qualify.

If you meet these requirements, you can take advantage of the first-time home buyer tax credit, which just got extended from November 30 to April 30, 2010.

The tax credit can be as high as $8,000, but may not exceed 10 percent of the purchase price of the property.

You’re entitled to receive the full tax credit if you’re income is $125,000 or less for single tax filers, and $225,000 for joint tax filers.

That’s up from $75,000 and $150,000, respectively; the extension of the tax credit has also been accompanied with a “move-up tax credit,” so even if you don’t qualify as a first-time home buyer, you can take advantage.

To qualify for the move-up tax credit, you need to have used your current property as a primary residence for five of the past eight years.

Of course, the move-up credit seems like a bit of a waste, because who in their right mind would sell right now with prices in the dumps and buy a new property given the tight lending environment and uncertainty?

Seems like a bit of a stretch by the interested parties (real estate agents, home builders, etc.).

There’s been a ton of talk about home price declines over the past couple years, but now a bit of optimism is starting to shine through, at least in select markets.

So, when will home prices rise, and why?  SmartMoney.com wrote a post on signs to look for that should increase the value of your home.

It’s not easy to time the market, but looking out for these positive signs could help you buy (or sell) at a better time.

Fewer Foreclosures

When foreclosure filings and related sales dip, there will be less of a drag on home prices in a given area.

Foreclosures have fallen from their record highs, but that’s only after a heap of government intervention and taxpayer dollars, so we won’t know if things have really improved for a while.

Falling Inventory

When housing inventory falls, home prices will rise; it’s basic supply and demand.

One of the major problems tied to the current housing bust was an excessive supply of new homes, and demand just couldn’t keep up.

That’s why you’ll see entire neighborhoods in fringe areas around the country that now look like foreclosure ghost towns.

List-to-Sale Price Ratios

When the listing price of a home and the selling price are more aligned, it’s a good sign that home prices are rising in the area.

Nationally, homes are currently selling at a 5-10% discount below their asking price; keep an eye on this metric and you may be able to get a head start over other buyers.

Lower Unemployment

Unemployment (and underemployment) has been on the rise for some time now, and with that comes an inability to pay the mortgage.

It also means fewer buyers in the housing market, deflating home values in the process.

Income Levels

Conversely, when income levels rise, home prices rise.

If the median household income of a certain neighborhood rises, there’s a good chance home prices will move higher as well.

More borrowers will be able to make mortgage payments and maintain and/or even improve their homes, lifting area home prices.

Home buying Q&A: “Can you purchase a home with no money down?”

It wasn’t long ago that you could purchase a home with nothing down, and even get assistance with the closing costs!

Back in 2006, 100% financing was the norm and you were a fool to put anything down; heck, there was even a mortgage lender named “Zero Down Mortgage.”

But these days have come and gone, leaving scores of foreclosures in their wake, making lenders think twice about lending so loosely in the future.

Nowadays, the only place you’ll be able to find 100% financing will be via government programs offered from the USDA or the VA.

Of course, these loan programs aren’t available to everyone, so in reality, you’re probably going to have to put some money down if you want that new home (how much should I put down on my home?).

Fortunately (or unfortunately depending on your viewpoint), prospective homebuyers are still able to put down as little as 3.5% to purchase a property via an FHA loan.

Government-owned Freddie Mac also offers its Home Possible® 97 Mortgage, which requires as little as 3% for down payment (loan to value ratio).

Some credit unions will allow you to purchase a home with as little as 5% down, while the larger banks and mortgage lenders want 10% these days.

Perhaps the best way to see all your options with regard to down payment is by getting in touch with a broker, who can shop your loan scenario with various lenders and explore their numerous programs.

Tip: Make sure you’ve got seasoned asset reserves in the bank to cover several months of mortgage payments and closing costs.

Real estate Q&A: “Are foreclosures listed on MLS?”

Foreclosures are plentiful at the moment, and though interest has grown for such transactions, not everyone is looking to scoop one up.

Though they could turn out to be bargain, they’re more often riddled with delays and headache.

The good news is foreclosures are listed on the MLS, or Multiple Listing Service, which is fairly easy to access to for free.

A lot of local real estate agents allow you to peruse listings on the MLS via their personal websites; this is obviously a more cost efficient means of access than those sites that make you pay or register, but it typically only shows results within the area they cover.

Once you’ve found a local real estate agent’s website that offers free MLS access, you can select certain criteria to narrow your search.

If you’re looking for foreclosures on MLS, you’ll probably be interested in listings that are active short sales, or those that are REO (real estate owned) or bank owned.

The latter are essentially foreclosures, so you can see what distressed property is selling in your area if you’re interested in trying to snag one.

Keep in mind that the listing agent may not mention that the property is in foreclosure, or bank owned, so you may have to do some digging.

But you might be able to tell from the picture, price, or description that the property is in foreclosure as well.

Also, not all foreclosures make it on to the MLS for one reason or another, so be sure to check with your local bank(s) to see if there are any properties nearby that aren’t listed.

Happy searching!