By Barbara V. Press
Sunday August 31, 2003
Becoming a homeowner -- the ultimate American dream. Who doesn't want to have a small place in the world to call their very own? Having a small piece of the American pie is becoming a reality to many dreamers in light of the seller's market that currently is thriving, thanks to creative lending solutions and the new 100 percent financing programs available to many potential buyers.
But what does "zero down" really mean? There are many costs associated with buying a home other than the loan itself. Obtaining homeowners insurance, a full appraisal, a pest inspection, and a deposit (usually $2,000 to $5,000) that is necessary to make a solid offer can cost a potential buyer $3,800 to $6,800 before the loan is even obtained or escrow has closed.
An entire year of homeowner's insurance on a $250,000 single family residence will cost about $600; a run-of-the-mill clear termite report will cost roughly $250 to $400, and a purchase appraisal nearly $350 to $400.
Many first-time buyers with limited cash assume that "zero down" means "free" to some degree. Although the deposit that is held in escrow until closing goes towards the final closing costs, it initially is a rude awakening for buyers that have limited, if any, funds at all.
Many sellers today that have another home in escrow and are anxious to sell, will agree to pay up to 3 percent of non-reoccurring closing costs for the buyer. This is of great advantage to a first-time buyer to receive a break on these costs associated with the loan.
If they qualify for a 100 percent financing and obtain a credit from the seller for closing costs, their out of pocket expenses at closing can be reduced dramatically.
There is one disadvantage to asking a seller to pay for non-reoccurring closing costs. If there is room for your Realtor to negotiate the sale price, many times the seller will not come down on the price if they are contributing to your costs and they may even increase your deposit requirements.
Lenders today are becoming more savvy in regard to first-time buyers and 100 percent financing. Credit and the capacity to pay back the collateral determine how much a lender will allow a prospect to borrow.
Many potential first-time buyers are surprised to learn that if they do not have at least two- to six months of reserves in mortgage payments in the bank (savings, checking, IRA, CD, 401(k) in addition to their closing costs (assuming "zero down") they will not qualify for a mortgage. (Many prime credit prospects also are not aware of this upon refinancing).
No down payment mortgages are a niche program for borrowers that meet very specific criteria. They're not for everyone. They're not even for the average buyer in this market, where houses are so expensive.
On the basis of most program guidelines, they are only for buyers with excellent credit, a high-risk tolerance, and the fortune to find a relatively low-priced home in a high cost real estate market. Most zero-down mortgages top out at $325,000, less than the price of most homes in the metro area.
(Barbara V. Press is Senior Loan Officer at Windsor Capital Mortgage Corp., 3160 Telegraph Road Suite 101 Ventura. She can be reached at (805) 644-7095, barbarapress@sbcglobal.net This article was originally published on The Ventura County Star Network.)