Slim Pickings for Buyers Without Cash for a Down Payment

By Ilyce R. Glink and Samuel J. Tamkin
Saturday, May 31, 2008; F10

M ortgage loans that allowed you to buy without a down payment were a fast ticket to homeownership for many first-time buyers over the past decade.

Thousands chose a 100 percent mortgage to grab their piece of the American dream, neatly sidestepping the single biggest obstacle to homeownership: cash for a down payment.

Too bad the credit crunch has almost completely wiped zero-down mortgages off the table.

According to several mortgage brokers and bankers, there is only one 100 percent loan program that is generally available: a VA loan, backed by the full faith and credit of the federal government through the Department of Veterans Affairs.

But VA loans are available only to people, or their spouses, who have met minimum service requirements. And VA loans are expensive, especially if you don't have any cash for the down payment. The VA requires borrowers to pay a funding fee of 2.15 percent for regular military veterans who are using their entitlement for the first time. If you put down 5 to 10 percent, the funding fee drops to 1.5 percent. If you put down 10 percent in cash or more on your purchase, the funding fee drops again, to 1.25 percent.

For a subsequent purchase, the funding fee rises to 3.3 percent if you don't have any cash to put down on the property. Similar funding fees are charged for cash-out refinances.

Of course, if you had 3.3 percent to pay as a funding fee, you'd probably look for a different loan.

Over at the Federal Housing Administration, you can't get true 100 percent financing, but you can get pretty darn close.

The FHA allows borrowers to get a loan for 97 percent of the purchase price. You are allowed to receive the 3 percent cash as a gift from a family member or relative or a nonprofit organization.

Although the Department of Housing and Urban Development recently tried to ban third-party nonprofit organizations from providing down-payment cash if the organizations receive funds that are generated from the transaction (like funds paid by the sellers), the ruling was set aside by a judge's order.

In the case of Nehemiah Corp. of America, the nonprofit organization that fought the ruling, the group would put up the 3 percent down payment required by FHA loans, and after the transaction closed, the seller would give somewhat more than 3 percent of the sales price back to Nehemiah to replenish its funds.

The bottom line for borrowers in this arrangement was a mortgage loan that required no down payment.

Who would benefit from an FHA loan? One lender described the profile as a dual-income married couple with marginal credit (credit scores of 580 to 600) and no savings, living paycheck to paycheck.

Other zero-down-payment mortgages have mostly disappeared from the marketplace. Investors seem unwilling to buy these loans, so the secondary market for them has dried up.

Meanwhile, stated-income loans -- whereby borrowers tell lenders how much they made and no one does income verifications -- have become scarce. They remain available for borrowers with excellent credit histories and scores and who have at least 25 percent to put down in cash, according to several lenders.

What should you do if you want to buy a home but don't have any cash? Try to get a family member, friend, local housing agency or nonprofit to gift you the funds you need to qualify. Unless you're a veteran, and even if you are, that may be your best path to homeownership.

Q I have a property worth $500,000 that I am selling for $300,000. I know it is worth $500,000 because I had it appraised recently at that value. A buyer wants to pay me $400,000 and then have me give him $100,000 back after the closing. Is this legal?

AIf your property is truly worth $500,000, you should get paid that amount, and any contract to sell the property should accurately reflect what you are getting paid for it.

Giving $100,000 to your buyer after the closing may be illegal on many fronts. If your buyer is obtaining a loan to buy the property, you may be participating in a fraud against the lender by structuring the transaction to deceive it into believing that the buyer is putting money down when he or she is actually getting money back after the closing.

It may also be illegal under the laws of your state and under your local municipal codes that require you to accurately reflect the sales price for any property sold by you.

By claiming that the property is actually worth $500,000 and that the sales price is $400,000, your buyer can get an 80 percent first mortgage on the property. That means the buyer wouldn't pay private mortgage insurance, which can be quite expensive.

If you then give the buyer another $100,000 out of the proceeds, cash the lender doesn't know about, you're really telling me that the property is worth only $300,000 while the bank thinks it's worth $400,000 or even $500,000. That's fraud, and since you're knowingly participating, you could be on the hook as an accomplice.

If your property is worth $500,000, why are you selling it for $300,000? Is there no one else willing to buy your property for $400,000 or $450,000?

If your property were really worth $500,000, you'd be selling it for $500,000, not $300,000.

That makes me wonder whether your appraisal is valid. If you received the appraisal from the buyer, perhaps the appraiser is in cahoots with your buyer or his lender (after all, it's the buyer's lender who hires the appraiser) or the appraiser is using information that is several years old. Or could something else be going on?

Before you do anything other than try to sell your property for the most money you can and structure the transaction to reflect what you are actually doing, you should consult with a real estate lawyer, who can further explain why this plan probably isn't in your best interests.

Last year, I put down $2,000 in earnest money on a house. In June, the seller agreed to close in July. In late July, the seller canceled the closing and was unable to provide a new closing date. Because I needed a place to live, I said I would no longer be interested in buying the home if we couldn't agree on a closing date.

I began looking for another home and gave the sellers of the original house several opportunities to set a closing date. Once I said I was no longer interested in buying the home and had signed the form to have my cash returned, they set a closing date. But it was too late. I have since bought another home, and the sellers will not release my earnest money. Also, because of an error on the gas company's part, the heat was disconnected and the sellers claim the water heater is broken. They offered to return half the earnest money, keeping half to replace the broken water heater. Is this legal?

What did the terms of your contract say about cancellation of the agreement? Were you required to send the sellers written notice? Or did the contract die when they failed to set a closing date? Did you have a real estate agent help you with the contract? Did you hire a lawyer?

If you hired a real estate agent, what has he or she been doing to help you with this problem? If you didn't use a real estate agent and you didn't use an lawyer, it's easy to see how you got in this situation.

Can the sellers hold you liable for a mistake their gas company made? It's unlikely. It's their property, and they needed to keep it in good condition. If the water heater broke, I can't see how this would be your fault, and I don't know why you'd think you would have to pay for it.

Still, they've made you an offer, and you need to respond. Your first move should be to hire a good real estate lawyer to explore your legal options. But don't be surprised if the lawyer tells you it isn't worth suing for $2,000 or wants to charge you at least that much to take the case. This doesn't mean you're wrong and the sellers are right. It's just that small-claims court might be a more affordable venue.

If I cancel one of my credit cards, will it affect my credit score?

It depends on how long you've had the card. If you've had it for only a short period and you have other pieces of credit that have been open and active for much longer, it shouldn't affect it too much.

But if you carry a balance on a card and close the account before you've paid it off or if you've had the card for 10 or 20 years, closing it will dramatically affect your credit score.

My dad died in March. He had credit card debt and had no real estate or vehicles. He was married and lived with his wife in Illinois. We do not live there. Who is responsible for the debt? They acquired most of it when they were together.

When someone dies, their assets and debts fall into their estate. It's the job of the executor of the estate to tally up all of the assets (including ownership in real estate, cars, boats, personal property, brokerage and retirement accounts, etc.) and all of the debts (mortgages, loans, credit card debts, etc.). The assets of the estate are used to pay off any debts that were still owed.

If your father had been single when he died, his debts would have effectively died with him. The creditors would have been notified that the borrower had passed away without any assets. Although they might try to get someone else to pay those debts (like his children), you most likely wouldn't owe anything on them. (If you had benefited from the debts in some way, you might have to pay something.)

But because your father was married, if he and his wife incurred these debts together, then she could be responsible for paying them. The question is whether she was a cosigner to these debts or simply an authorized user of the accounts. If she was a cosigner to the credit cards, then she would be responsible for paying them off. If she was simply an authorized user, she might not be liable. She should speak to an estate lawyer to go over your dad's affairs and figure out whether she has liability for those credit card debts.

If you have other questions about these issues or about any responsibility you may have for them, consider consulting with an estate lawyer.

My sister-in-law lives in a condo and pays a $150-a-month maintenance fee. Her roof is leaking, and she has reported it. This has been going on for several months. What are her options?

I say she should stop paying her maintenance fee and place the money into escrow until the repair is made. She reported it in writing, so she has a record of her complaint.

The last thing your sister-in-law should do is stop paying her monthly assessments. If she does that, she will have late fees and other charges added to what she owes. She'll also make her neighbors angry, which might make them less willing to help her.

She's smart to have made her complaint in writing. The first thing she must determine is whether her association is responsible for roof leaks. Some condominium associations place the responsibility for roof maintenance on homeowners.

If the roof is the association's responsibility, her next letter should indicate whether the leak has gotten worse and whether other problems are occurring. If the leak is causing other damage to the building or, worse, mold is starting to grow, the cost to make repairs will grow exponentially.

She should be asking why the management company isn't being more responsive to the problem. The leak could pose legal risks to the association. If she determines that the association is hiring a company to make repairs, she might have to wait until bids come in. If the association has done nothing, she will have to do more to get its attention to the problem.

She should be raising the alarm with everyone on the condo board and making a complete pest of herself (in the nicest way possible, of course) with the management company until she gets a date when someone will come out to inspect and repair the problem.

She should point out to the association that repairing the leak sooner rather than later will avoid additional expenses as the damage gets worse, including structural problems as water damages the roof and its other components and, worse, mold starts to grow.

If no one takes action, she should consult with a real estate lawyer who can advise her of her options, which might include suing the condominium association. That would be an unfortunate move because it would be likely to damage her relationship with her neighbors and cause money to be spent in legal fees that could otherwise have been used to repair the problem.

We had to sell our house because we were getting divorced. Our broker had a buyer the day after she put the house on the market. She strong-armed me to agree to the asking price, telling me that my husband could make me sign a quitclaim deed -- as he sat there in agreement.

I did not know what to do except sign. A few weeks later, I realized that she was both the buyer's agent and seller's agent and didn't want to lose the deal.

She wrote e-mails demanding that I send her the signed documents before closing. She then helped me buy the house I was to live in after the divorce.

When I told her the divorce might not get finalized in time to provide the cash to buy the house, she insisted that I spend $20 to express-mail the documents to the closing office or I would have to take time off work to drive 90 minutes out of town to the courthouse where the judge presided.

After we closed, I discovered that the air cleaner that was a selling point in the listing was not working. She e-mailed the agent and threatened that I would get a lawyer if the sellers didn't fix it. I never gave her permission to do that. Now she is advising me to get a lawyer or take the matter to small-claims court.

She never offered to use her commission to help me pay for it nor help me pay the $20 for express mail to get the divorce decree to close on my house. She always "put the ball in my court," and I feel she did not work for me. Is there anything I can do to make her help me out from her commission, besides complaining to the state board of Realtors?

Frankly, it seems that your agent did assist you and did her job well. She got the home you owned with your former husband sold. She assisted you in getting the sale closed, and she helped you buy a new home. She even tried to force the sellers of the home you bought to fix the broken air cleaner.

You stated that you were forced to sign the document for the sale of the home, but you didn't claim that the price you got was inadequate. You stated that you would have had to drive for hours to get documents for the closing and she was able to get them for you for $20.

It's not your agent's responsibility to guarantee the condition of the home you bought. It's not the agent's responsibility to pay your expenses or to make repairs to your home out of her money. Did you inspect the home before the closing to make sure the air cleaner was working? You should have. Certainly you would have had much more leverage over the seller had you known before the closing that the air cleaner was broken.

Your agent shouldn't give you legal advice. Did you hire a lawyer to assist you through this difficult time in your life? Did you have a divorce lawyer to make sure your rights were protected?

When it comes to your agent, it doesn't seem that you have much to complain about except for not understanding clearly that she was a dual agent on the sale of your home. (Did she have you sign an agency disclosure agreement? That's a document that outlines your working relationship with the agent.)

But even without knowing she was a dual agent, you didn't claim that you wouldn't have sold the house or that the price was too low. She might have been pushy and demanding, but she accomplished what needed to be done.

Your expectations about real estate agents seem unreasonable.

Can I back out of a refinance if I did not sign the papers? And how much will I have to pay?

If you're refinancing your primary residence, you have a three-day right to rescind the deal -- even after you have signed all of your closing documents at the table.

It sounds as though you haven't even gotten to that stage. Presumably, you applied for your mortgage but now don't want to close.

In some instances, you might not have to pay anything, while in others you might be obligated to pony up some of the costs. If you paid a fee upfront for the application process, you might lose that amount. If you signed a document with the lender agreeing to pay for some of the out-of-pocket expenses associated with the refinance, you could wind up having to shell out for these fees.

For example, some lenders will have you pay an application fee and some additional amount to lock in your interest rate. That document may state that you will lose all or a part of these funds if you decide not to close.

Other lenders' agreements may state that if you don't close for any reason other than the lender deciding to deny you the loan, you will have certain costs to pay.

Review the documentation you signed to see what it says about your obligations to pay. You may find that you'll lose only your initial payment.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites,http://www.thinkglink.comandhttp://www.expertrealestatetips.net.

© 2008 Ilyce R. Glink and Samuel J. Tamkin

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