If you qualify for an FHA loan to buy a home, traditionally you should be prepared to come up with 3% of final sales price in out of pocket funds to put down on the transaction. It’s a requirement. You can’t really get around it in on a home loan purchase. You can finance 97.75% of the loan amount, but you still have to have the remaining 1.25% of the aforementioned to put toward closing costs. Anyway you look at it, you need 3%.
Well, all is not forsaken. There is another way to come up with the 3% that doesn’t require hawking grandma’s pearl necklace or selling your 2nd car. There are down payment assistance programs out there to lend a helping hand. They can be considered a “gift”, and they are available for FHA loans that are single family and 1-4 unit dwellings. The two big names are AmeriDream, Inc. and The Nehemiah Program, and they provide these gift funds to qualified homebuyers.
How much in gift funds can be made available to you? 1% to 6% of the final contract sales price or a flat gift amount not to exceed 6% of the final contract sales price. And, in addition to the gift from AmeriDream or Nehemiah, the seller can contribute between 1% and 6% of final sales price toward the borrower’s closing costs. So, here’s the big secret, you can basically obtain an FHA loan with little or no down payment if you qualify.
How is this scenario possible? Well, it all depends on the deal you’re getting on the house. Basically, the seller is financing the down payment gift by not netting as much on the sale of the home. The seller or the lender also must pay the “down payment processing fee”, so your closing costs are going to go up $350-500. But, if you are buying a home below the lender’s appraised value, it can work!
Here’s an example. Say John and Susie Homebuyer have excellent credit but no cash to put down on a property. They are working with a great realtor who finds a home for sale that’s worth $120,000, but it’s generally acknowledged the seller will accept around $100,000 for it. The closing costs will run about $4500 (including the gift processing fee) and John and Suzie must invest $3,000 (3% of $100K) of their own money in the transaction per FHA guidelines. So, John and Suzie offer the seller $107,500. The seller agrees to participate in the Down Payment Assistance program and contribute $3,000 toward the buyer’s closing costs. This contribution becomes the “gift.” In addition, the seller agrees to pay $4500 in closing costs. The seller nets $100,000 from the transaction as anticipated, and the buyers pay the 3% down payment via a “gift” from AmeriDream or Nehemiah. The appraisal comes in comfortably above asking price and everyone’s happy.
The down payment assistance programs mentioned are large and respected community development programs, and they are a great deal for homeowners if they qualify and the seller agrees to contribute. With sellers willing to make sales concessions lately, it’s an excellent market for AmeriDream or Nehemiah. It’s critical that your realtor understand that you want to utilize these programs when you negotiate. Make sure they are aware of it and if need be, have your loan officer and realtor communicate with one another prior to house hunting. It’s also useful to have your lender prepare a good faith estimate for you prior to making an offer on a specific home so you can make sure all your numbers work and the offer is worded correctly with all the proper forms attached. And the good news is the programs still work with some of the competitive first time homebuyer programs out there like Tennessee Housing Development Agency with below market rates (but you don’t have to be a first time homebuyer).
So, who says you can’t get 100% financing anymore?
Reproduced with permission from Kristin Abouelata. To read more articles by Kristin Abouelata, click here Copyright 2008 Kristin Abouelata. All rights reserved worldwide.