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No Money Down May 13, 2005

View from a CastleUnless you’re a recluse, you’ve either seen or heard the words “No Money Down!” being applied to purchasing a home. People who are “in the know” believe this to be trickery. But some people actually do qualify and do move into a home of their own with absolutely no money out of pocket.

When you obtain a home mortgage, you’ll get an interest rate that is either below par, at par, or above par. “Below par” means that you have to give money to the lender to obtain the rate. This is also called “buying down” the rate. You ordinarily will only do this if you are going to stay in the house for a long time. “At par” means you don’t give any money and your broker receives no money to obtain the rate. Finally, “above par” means the broker doing your loan will receive money back from the lender when you get this rate. This can be as much as 5 % of your loan, or even higher in some cases.

Here’s how “No Money Down” actually works. Lenders will pay mortgage brokers a rebate for giving the client a higher rate than necessary. Brokers will then use that rebate to pay your closing costs. What remains from the rebate after closing costs, the broker will retain as his/her origination fee or broker fee. The thing to note here is that there is no such thing as “no cost”. The broker is paying your costs for you with the money they receive from the bank.

Often, “No Money Down” doesn’t work with small loan sizes or with “less than perfect credit”. This is because with small loan sizes, even the maximum rebate won’t be enough to pay your costs. If your loan size is $60,000, even with 5% paid toward your closing costs, there will be very little left over for the broker. With poor credit, the maximum rebate is 3% instead of 5% or more. This makes it even more challenging to pay all of the borrower’s closing costs. Finally, to make “No Money Down” actually work, you also have to have “no impounds”. This means that you will be responsible to pay your taxes and insurance on your own instead of paying it monthly as part of your monthly payments. Brokers are not allowed to pay your prepaid taxes, prepaid insurance, or prepaid interest. So if you have impounds, you’ll have to pay them at closing. This wouldn’t be considered “No Money Down” by most people since it can easily be $1,000 or more.

Is “No Money Down” actually possible? Absolutely! Can anyone do it? Of course not. What’s more realistic is $2,000-$5,000 down. With this small amount of money, the majority of renters with decent credit can become homeowners next month.

Russ Shulman is President of Trusted Home Mortgage of Lynnwood
He can be reached at Russ@wearetrusted.com or (425) 712-0282

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