Can you really buy a house with only $100 down?

Chattanooga Real EstateOne of the very best-est things about buying a HUD home as an owner occupant is the $100 down payment program available with FHA financing.

Since 80/20 mortgages went the way of the dinosaur, there have been only a few options for those who don’t have the cash for a traditional 3.5-5% down payment. One of those is to purchase a HUD home via FHA. The only down side is that the inventory of houses available is fairly small. This isn’t something that can be done with just any house, the home must be a HUD-owned foreclosure.

Unfortunately, the powers that be don’t do a very good job of promoting this program. That’s one reason why you want an agent – like me! – who is experienced in dealing with the paperwork and (unfortunately, rather frequent) policy changes of these programs.

Besides the down payment, there are also closing costs and pre-paid items that go into your escrow account (like some money toward the taxes and insurance) that you’ll have to pay at closing. So it will take more than $100 from start to close. The good news is that HUD will pay your closing costs up to 3% of the purchase price – which means that if you’re paying $100,000 for the house, they’ll ante up $3,000 for you.

HUD also requires that you give them an earnest money deposit of $500 for houses with a purchase price of $50,000 or less. You’ll need to plunk down $1,000 for a home that’s more than that. For most houses that are at least $100,000, your earnest money combined with the 3% will probably cover everything (talk to your lender for specifics).

If you’re one of the many who can afford to own your own home but can’t afford the down payment to buy your own home, HUD’s $100 down program might be a great way for you to experience the joys and tribulations of owning your very own piece of America.

Click to see which homes (probably) qualify for this program – available HUD homes in Chattanooga or contact me for more information!

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How 3% can make all the difference

{{You’re gonna have to hang in there with me, this one definitely gets filed under ‘boring but important’}}

Today, HUD announced new rules for FHA mortgages that will go into effect in the near future (“summer” whatever that may mean). Those who don’t eat, breathe, and live real estate finance like I do may not know this, but FHA has become the go-to loan for most borrowers, especially first-timers and lower income, but really for everyone who doesn’t have 20% to put down.

Here are the proposed changes:

Anyone with a credit score under 580 is required to put down 10%

In practice, most banks aren’t lending to anyone with a score of less than 620 these days anyway so this one won’t have much of an impact.

The up front mortgage insurance is being raised from 1.75% to 2.25%

For a $100,000 loan amount, this means that the house would cost you an extra $500 which can be financed into the loan. Again, not great but not a huge deal in the grand scheme of things.

FHA FinancingSeller concessions limited to 3%

This is the one that gives me heartburn. What’s a seller concession, you ask? In most cases, it’s your closing costs. With FHA, you can get a loan with as little as 3.5% down. For first time buyers without a lot of savings, that means you can buy a $100,000 house with not much more than $3,500 out of your pocket, assuming the seller pays your closing costs. That last part is the kicker. Currently, the seller is allowed to contribute up to 6%. And 6% is plenty when you are talking about a $100,000 loan. You aren’t usually going to go over $6,000. But you are probably going to go over $3,000, the new limit in this scenario.

And if you are looking at an even smaller amount, say $50,000?  Three thousand dollars would probably cover your closing costs so you could buy a $50k house for as little as $1,750 out of pocket. Now, with the seller only contributing $1,500 toward your closing costs, that almost doubles what you’re going to have to pull out of the old tin can in the back yard. That’s HUGE!  Anyone looking to live in a $50,000 house – they’re rare, but they do exist in Chattanooga – probably doesn’t have that extra $1,500.

And that’s why I don’t like this change. Looking at houses in the $200,000+ range? You probably won’t notice a difference. But all of those first time buyers who are near and dear to my heart (yes, it’s far more gratifying to sell someone their first house), are to put it bluntly, are getting screwed.

So to all those who need to use FHA financing and who don’t have an extra couple thousand dollars in your mattress, now just became an even better time to buy. Don’t wait until ‘summer’!

Click to search Chattanooga houses for sale.

Disclaimer: all those closing costs number I’m throwing around up there don’t mean that I (or anyone else) is offering a loan with those exact costs, those are big round numbers to illustrate the point.

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Frequently Asked HUD Questions

What does “insured” or “insured with escrow” mean?

HUD homes are usually listed as being “insured with escrow for required FHA repairs” or occasionally “uninsured.” What this means to the buyer is that, if you are using FHA financing, a home insured with escrow will require some repairs as part of the conditions of purchase. With non-HUD houses, these repairs would have to be completed prior to the closing of the sale. With HUD homes, the repair allowance amount, shown in the listing, is added to the amount of your loan and amortized into your monthly payment. After the closing of the sale, you will be required to complete these repairs and pay for them out of your pocket within a specified period of time – usually 90 days, although extensions are usually possible. Once the repairs are completed, the FHA appraiser will return to assess the repairs, making sure they have been done to FHA specifications. At that point, the homeowner will submit receipts for the work and will be reimbursed from an escrow account set up by your lender. If the total of the receipts is less than the amount in the escrow account, the remainder will be credited back to the balance of your loan. Any amounts over the escrow amount will not be reimbursed. If a home is listed as “uninsured,” FHA financing is not available. These places usually require fairly extensive repairs and should be considered by investors or those who are comfortable tackling relatively long term projects. Every once in a while, someone will luck out and find a house that is just “insured.” This means that FHA financing is available without any required repairs. If you see one of these that isn’t a practically brand new house, be sure to go play the lottery that day, for lady luck has smiled upon you.

What kind of deposit do I have to put down?

For most houses, the earnest money required is $1,000. For some, fairly inexpensive houses, you will only have to give us $500 up front. The biggest difference between HUD earnest money and others, is that it HAS to be in the form of certified funds, most sellers will let you write a personal check at this point. HUD doesn’t trust you as far as they can throw you. The good news? If you are using FHA financing and plan to occupy this house, this could very well be the only money you have to come up with.

What do you know about the condition of the house?

HUD provides a “Property Condition Report” which assesses the overall condition of the home with a checklist of all structural, mechanical and, to some extent, cosmetic items in the home. You can find this report on any currently listed home by clicking here and searching by the address. This report is not a substitute for your own home inspection. Problems with plumbing or electrical systems are often shown simply as not functional without specifying the source of the needed repairs. In other words: we’ll tell you what we found upon a simple inspection but really, as the buyer, you should beware.

More to come later!

Contact me for more information about anything you see on this blog.

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First Time Home Buyer Alert!

THDA, Tennessee Housing Development Agency, has introduced their anticipated second mortgage program. The program is designed to be used in conjunction with the stimulus tax credit for first time home buyers. The purpose is to assist potential home owners by providing a no interest loan which will enable many first time home buyers to purchase a home with little or no cash out of pocket. THDA recommends that borrowers use their tax credit to pay the loan off, when the credit refund is received.

Some details:

The THDA second mortgage is for the down payment. It is only available with an FHA loan closed with the THDA Great Rate or THDA Great Advantage programs.

The minimum credit score is 620.

THDA’s maximum income & purchase price limits apply.

The program is offered to first time home buyers.

If the borrower decides not to repay the second mortgage with their tax refund, payments can be made. The loan is interest free until June 1, 2010. At that time the loan will convert to a 10 year term with an interest rate 1% above the first mortgage rate.

For the THDA Great Rate program, the current interest rate is 5.55%.

For the THDA Great Advantage program, the current interest rate is 5.85%.

The second mortgage can be used for downpayment or for closing cost, but is in the amount of the 3.5% FHA minimum down payment. The second mortgage can be used with other sources of closing funds that are acceptable to FHA: gift funds, seller paid costs, and of course the 2% grant from the THDA Great Advantage program.

More details on THDA programs are posted here.

If you have any questions about eligibility for this program, please contact me for more information.

Reprinted with permission from Richard Smith, American Acceptance Mortgage, Inc Chattanooga, TN (888) 474-9920 x 15

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