The Seller’s Gift: How To Buy a Home With No Down Payment
Published on - January 26th, 2007 (by J.D. Roth) Matt wrote to me with an unusual homebuying tale which he’s also posted to his site, Zero Down: My Homebuying Story. On December 29th, he closed on a $90,000 Texas home. His total out-of-pocket expense was $70. He writes:
Anyone who can get a mortgage can pay zero down for their new home. I wrote this web page because I think I have an interesting story. Some of the home buying techniques I discovered are not widely publicized, and in the spirit of sharing, here is how I did it.
Matt’s secret? Asking for a “seller’s gift”, which is a financial sleight-of-hand that, in effect, builds the down payment into the mortgage.
I was worried that Matt’s site might be some sort of scam, but after checking things out — and based on Matt’s assurances — I believe he is for real. As he says, “I am not a real estate agent, a mortgage broker or an attorney. This is a true story, but your experiences may be different.”
It’s important to note that Matt is on top of his finances: he’s young, upwardly mobile, and frugal. He just didn’t have cash for a down-payment. Some creative thinking helped him purchase a house. But a seller’s gift should not be viewed as a means to get into a house with a mortgage that will break your back.
Read more about seller’s gifts at:
- Chicago Tribune: A seller’s ‘gift’ to home buyer
- About.com: Downpayment gift asssitance programs
And be sure to check out Matt’s story about his no down payment home.
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This really only works if you can buy a house under market value (because the bank generally won’t give you a mortgage for more than that). If that’s the case, then the seller really is giving you a gift.
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Ummm…how does a guy who has “credit card debt and a high car payment” get described as “on top of his finances…and frugal”?
I wish Matt well, I really do, but without knowing the terms of his mortgage I’d have to withhold judgement that what he’s done qualifies as a success story. Remember, every single foreclosure happens to someone who once qualified for a mortgage.
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as touched upon by brian above… this really will only work in specific situations. In my understanding, your only going to be be getting a loan for, at most, 90% of the appraised value of the property. so, im guessing that the property that was purchased for 90k financed, 70$ down must have appraised for at least 100k.
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When I closed on my house, I left the closing with a 4000 check. This was for items like appliances and other things I wanted to do. How I did it? I asked my lender. I said, I would like my loan to be over the amount I am paying for the house and take the cash out. She said. OK. All we have to do is make sure it appraises for that amount. It did, I took my check away. No money out of pocket, and nice new appliances and a lawnmower and bbq.
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Yeah, unless you find yourself in a position where you need a house NOW and, while you’d be *able* to save up a down payment you simply don’t have time to do so, I’m not sure how this gets you ahead of anything. Outside of that scenario (and I can’t think of any real-world examples offhand), it’s just a way to give the bank even more interest.
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Ummm…how does a guy who has “credit card debt and a high car payment” get described as “on top of his finances…and frugal”?
Vintek, you make an excellent point. Somehow I missed this when I read it before. I’ll strike that bit from the entry. And I agree — this does make the “no down payment” stuff more worrisome. At least Matt is a GRS subscriber, and so gets frequent exposure to debt reduction techniques.
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“The Reviewer’s” comment reminded me of another interesting way to build expenses into your mortgage: the Energy-Efficient Mortgage If your home needs energy-efficiency improvements, you can finance the cost of those improvements by building them into your mortgage. On the other hand, if you’re buying a house that qualifies as energy-efficient (usually this means meeting state or ENERGY STAR guidelines), you can stretch your debt-to-income ratio and qualify for a larger loan than you would otherwise, because your energy bills will be low and you can thus afford a larger monthly mortgage payment. The latter strategy is not necessarily something I’d recommend, but if it lets you get your dream house it’s okay.
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Just a note. Matt used a ‘non-profit’ downpayment assistance agency. Well the IRS has called into question whether those DPAs will be able to remain as non-profits. I would be sure to do my research thoroughly before taking advantage of this option.
-John
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“When I closed on my house, I left the closing with a 4000 check. This was for items like appliances and other things I wanted to do… No money out of pocket, and nice new appliances and a lawnmower and bbq.”
Not to doubt your wisdom or anything, and I could be completely wrong, but doesn’t that mean that you are going to be paying interest (albeit ~6% interest) on your lawnmower for like 30 years?
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John: Isn’t there a gift clause that allows individuals to give up to $11 or 12,000 to each other tax free? Or is that just for family members?
Another question, could the seller not have just simply paid for the other expenses as well rather than going about it this way?
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I live in California and I bought a $350,000 condo with no down payment, although we did pay our closing costs (we could have financed them too though). We financed through CalHFA and used many of their down payment assistance loans which are deferred and the interest is simple, meaning there is no benefit to paying down the down payment loans because the same interest is charged no matter the balance on the loan. The interest collected on these loans when buyers like me sell goes to finance the next round of first-time homeowners. I really encourage anyone that is trying to buy their first home to look into financing through their state’s HFA. The rates are below market and they have many different programs available.
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“Not to doubt your wisdom or anything, and I could be completely wrong, but doesn’t that mean that you are going to be paying interest (albeit ~6% interest) on your lawnmower for like 30 years?”
This story reminds me of my financing of our car from two cars ago. We didn’t have enough cash available on the down payment to convince our bank to give us a loan. Empty savings & a crappy trade-in. The car dealer had the brilliant plan of upping our trade-in by $1500 and increasing the sale price of the car by the same amount. The sale price was still close enough to the blue-book, and the new total down-payment was now a high enough percentage of the price, that the bank was willing to float the financing. And we ended up with considerably more car payment than we could really afford. I think the car dealer won that round …
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If you have been paying more than the appraisal value for real estate, I suggest you reconsider your strategy. Most houses appraise for more than the selling price. Funding 4k into a seller’s gift won’t jeopardize your mortgage from that angle.
As for the validity of DPAs.. yes I saw those questions, but the answers don’t affect me, as far as I can tell. If I were a seller I would have to look into this option in much greater detail. In Texas *the perception* is that we’re in a fierce buyer’s market. I played off that perception.
I’m not the most frugal person, by any means, but I qualified for a loan almost double than the loan I took. My credit card debt was the result of an acceptable but unfortunate cost, and it’s true, I splurged on a new truck.
Waiting another 9 mos to a year to save up for a down payment was certainly an option but I decided against it. Yes, I am paying interest on my down payment. Yes, this sucks. But I get a tax break and I’m not pouring money into fruitless apartment rent. Borrowing from family or friends may have been a better option, financially, but for me it was a deal-breaker.
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While the process described in the linked article seems to be on the up-and-up, I should mention that schemes such as The Reviewer describes in comment #4 above are most likely illegal. When a home buyer takes out a loan for larger than the purchase price, it’s called mortgage fraud.
See a well-written article on the subject, or do a Google search yourself.
With the housing market slowing down across the country, cash-back schemes are really starting to come to light. It isn’t pretty when people with over-100% financing can’t sell their home that’s now worth even less than they paid.
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I did the same thing for my house. I bought a $120,000 house, had the closing costs built into the mortgage, and only paid about $200 out of pocket. I also got a great mortgage with NO PMI. I really had to shop around for it, but it was worth it (I saved over $200 a month from my first quote.)
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Be CAREFUL with these types of loans.
http://exclusivebuyerrealty.com/weekly-tips/mortgage-tips/no-down-payment-dangers/
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I can only really speak for Australian lenders, but be aware that most of the lenders with the best interest rates will not approve mortgages for more than 90% of purchase price. While houses may appraise for more, a bank is interested in how much it can get back in a quick sale if they have to forclose on the mortgage. If the seller isn’t making the appraisal value, the bank’s chances don’t look good either. They also want to see capacity to repay the loan, and not being able to save some sort of down payment isn’t an encouraging sign. Think carefully about why you have to have a house NOW, why you haven’t been able to save a down payment up until now, and whether you’re getting the best deal on your mortgage that you could, or it you lack of downpayment holding you back from qualifying with the best lenders?
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I was thinking of becoming a investor until I got to talk to some realtors. I was told that I could buy a home from a person that was in foreclosure using the equity in the house for my 20% down payment. They also told me that I would not be buying the house at market value I would be buying it under market value thus leaving majority of equity in the house. I was told that you cannot do that. What are the legal issues here?
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