Monday, June 16, 2008

Beware of buying a home with "no money down"

"It's still possible to buy homes with no money down. In fact, it's possible to borrow as much as 105 percent of the purchase price, leaving the buyer with more debt than the house is worth.
It might sound like a pitch from a late-night infomercial, but the offer comes from Freddie Mac and Fannie Mae, two government-chartered companies with potentially conflicting mandates to uphold prudent lending standards and make home-ownership more attainable.
Freddie Mac says its "HomePossible" mortgages can help buyers with limited credit or savings such as teachers, firefighters and members of the military."

Click here for complete article.

This is a news story from the Austin American Statesman that was published yesterday in the paper and online. Since lending issues became big news back in September of last year with the sub-prime lending fall out, I have been answering all kinds of questions about lending practices and what types of programs are still available. The lenders that I work with most often, have some really great plans available and rates have been low lately although they are rumored to rise in the somewhat near future.

This article is about how Freddie Mac and Fannie Mae have mortgage programs that allow home buyers with limited credit or savings to borrow up to 105%!!! I really don't think this is a good move for most people in this situation. Home ownership is a big responsibility. I think a homeowner should be able to save at least 3-5% for a down payment on a home. Any less than that and the buyer is putting themself at a huge risk. Lets say Buyer "a" buys a $250,000 home with 10% down. They pay $25,000 at closing and owe $225,000 on the home. Buyer "b" purchases a $250,000 with no money down. Buyer a will not only have lower monthly payments because they owe less but also because they will probably qualify for a lower interest rate. If both of these buyers needed to sell their home in 6 months to a year because of an emergency or if they are being relocated for work, Buyer "b" would be in a pickle. They will be hard pressed to sell their home for an amount that will cover their mortgage, REALTOR commissions, and closing costs. Since they didn't have savings in the first place they may not have any at that time and they would be unable to close without a loan from another source. If Buyer "a' was in that situation, they could try to sell the home for at least what they bought it for and while they would see a loss, the sale is possible because they have equity in the home.
Some lenders have programs where the lender pays the buyers closing costs to help homebuyers with limited savings. These programs usually require at least 5% down but it does end up saving the buyer some of the money they need upfront.
Definitly plan ahead when thinking about buying a home. Please contact me if you think that now is the right time for you to buy.

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