Creative Financing

 One way or another, it is possible to purchase your  next home with nothing down or a low down pay ment. The Multiple Listing Service (MLS) doesn't indicate that a home is available with nothing down,but many individuals have purchased homes with no down payment. It's up to the homebuyer to structure the purchase so that he or she can walk away having spent little or no down payment cash. The following sections describe some of the structures that can make this possible. Assuming someone else's mortgage Hundreds of properties in every area of the nation can be purchased through assumable mortgages. If you aren't looking forward to having to qualify for a home loan, assuming someone else's mortgage is an attractive alternative. When you purchase the property, the mortgage is transferred to your name.

Another advantage of an assumable mortgage is that the new owner receives the previous owner's interest rate. Many older FHA, VA, and private-party mortgages are assumable.

Most fixed-rate mortgages are non-assumable. In some cases, lenders can call for full payment of the loan as a result of the transfer of the title. This makes the loan non-assumable.

When interest rates are high, lenders are reluctant to offer assumable mortgages. As a result,lenders are adding "due-on-sale" clauses to their mortgages, making their loans non-assumable.There are a few exceptions:

• Some due-on-sale clauses may not be enforceable. For example, FHA loans created after December 1, 1986, may be assumable with lender approval. VA mortgages issued before March 1, 1988, are assumable without lender approval.

• If the loan is non-assumable, you can always ask the lender to allow you to assume the existing mortgage. If the loan is in default, the lender may be motivated to accept yourrequest to avoid foreclosure. (Mortgage lenders loan money, they don't want to own and manage property.)

Doing a seller-take-back

Vacant houses or condominiums are often clues that the seller is anxious to sell. Find out exactly why the seller has put the home on the market. Sometimes you won't get a truthful answer, but often you'll learn that the seller has to quickly

Seller-take-back is a type of seller financing in which a buyer assumes the seller's current mortgage and acquires a second mortgage from the seller for the balance of the purchase price. For example, suppose you want to purchase a $100,000 home. The seller owes the lender $70,000 at 8 percent. You, as the buyer, assume the mortgage (or assume the mortgage with a novation). With a mortgage assumption, you now owe $70,000 to the lender and $30,000 to the seller. The seller gives you a second mortgage, called a "seller-take-back," for, say, five years at 6 percent (or some other figure below the market rate).

Sometimes the lender may also require the buyer's assuming the mortgage to put some money down on the deal and/or pay closing costs. In additon, the seller may finance much of their equity, but need some cash from the new buyer to pay for some costs they have incurred. This will be part of the negotiation for seller financing with the buyer.

If you assume the loan, who is responsible if you default on it? Here are the general guidelines:

• With a mortgage assumption, the buyer promises in writing to pay the loan. In case of default, the lender will first look to the buyer for payment, then look to the seller because his or her name is still on the promissory note.

• With a mortgage assumption with novation, the lender substitutes the seller's liability for the buyers. This releases the seller from the personal obligation created by his or her promissory note. The lender can now require the buyer to prove financial capability and often has the option of adjusting the interest rate on the loan to reflect the current market rate.The advantage of this type of deal is that it eliminates any hitches that could slow down closing the deal. Other advantages of seller-take-backs can include the following:

• Sometimes the seller can sell the house at a price slightly higher than the market value.

• In a soft real estate market, a seller-take-back makes a home more attractive to buyers.

• The seller can sell the property more quickly than using conventional methods. This technique is more likely to be used in a weak housing market with few buyers. In a strong housing market, it will not be used very often because most buyers will be able to get a regular mortgage.

• What if the seller wants money out of their seller-take-back financing? In many cases, they can sell the note to an investor or finance company and get cash for the note.

Renting with the option to buy

In some instances, you might be able to rent a property with the option to buy. In this plan, you rent the property and pay a premium for the right to purchase it within a limited time period, at an agreed upon price. In some arrangements, all or some of your rent is applied to the purchase price. This option might help you save money if the current interest rates are very volatile.This approach allows individuals to lock in a purchase price. You can also buy time, with the hope that lender interest rates will decrease in the future,making the house more affordable. If your credit history needs times to heal, this allows time for any problems to be remedied so you can find financing. Additionally, while living in the house, you may discover major structural problems or other issues that might make you realize that you don't want to purchase the home after all.

You will want to pay careful attention to the contract you sign on a lease purchase. Often you will be paying slightly higher rent than market rent, with part of your rent going toward the down payment on the house. If you decide not to buy the house,you may lose the amount you have accrued toward the down payment. You usually have a limited period of time in which to decide to buy the house.If you need to move in the mean time, or cannot meet the requirements for a mortgage, you may lose the amount you have accrued on this lease purchase, depending on the terms of your agreement.

Using equity sharing

Equity sharing, sometimes called a shared appreciation mortgage (SAM), is where you make monthly payments at a relatively low interest rate, and you agree to share with the lender a portion (usually 30to 50 percent) of the appreciation in your home's value when you sell or transfer the home, or after a certain number of years. Usually, during times offalling house prices, these types of plans are not available.

A benefit of a SAM is a lower-than-market interest rate. A limitation is that you may be forced to sell your property (on the mutually agreed-upon date)before you're ready to move. Equity sharing plans come in a number of varieties:

• Some lenders offer one type of SAM, and individual sellers may offer SAMs with different terms. For example, a parent could enter into a SAM with a son or daughter who doesn't have enough money for a down payment. In this situation, an adult son or daughter is helped, but he or she may not qualify for amortgage on his or her own because of a spotty employment record or marginal credit.

• Some SAMs are for tax purposes. In this partnership, the first individual puts up the downpayment, and the second individual pays the house payments. In return, the first individual gets all the tax advantages. In this situation,the second individual may not need the tax advantages—perhaps she or she is a student going to school full-time or an elderly parent living on a pension.

Special programs for first-time homebuyers

Many down payment programs are designed to help first-time homebuyers. These programs can be divided into three categories:

1. Down payment assistance programs.

These programs provide first-time homebuyers with the funds needed for a down payment and closing costs. They can be outright grants that don't require a down payment. Some programs require repayment when the home is sold or if the borrower moves before a specified time period. Other programs have deferred payments that are second mortgages or loans at below-market interest rates. Sometimes, down payment assistance programs are combinations of these formats.

2. Mortgage credit certificates.

Mortgage credit certificates (MCCs) are offered by any lender in partnership with the Internal RevenueService (IRS). Mortgage interest is tax-deductible. Therefore the IRS does not deduct funds from the homeowner's paycheck. This allows the homeowner to make a larger house payment.Here's an example of how a mortgage credit certificate can make buying a home affordable for you: Say you obtain a mortgage loan of $50,000 at 9 percent for 30 years with monthly payments of $403 and an MCC credit rate of 20 percent. In the first year, you pay a total of$4,486 of interest on your mortgage loan. Because you have an MCC, you could receive a federal income tax credit of $897 (20 percent,or $4,486). If your income tax liability is $897or greater, you will receive the full benefit of the MCC tax credit. If the amount of your tax credit exceeds the amount of your tax liability, the unused portion can be carried forward (up to three years) to offset future income tax liability. The remaining 80 percent of mortgage interest, or $3,589, qualifies as an itemized income tax deduction. By applying the increase in your take-home pay of $75 toward your monthly mortgage payment of $403, your effective monthly payment would be $328 ($403 - $75). Based on the effective monthly payment of $328, your first year's interest cost would be effectively reduced from 9 to 6.85percent.

3. Subsidized interest rate loans.

Many cities, localities, and states offer low interest rates that are subsidized by municipal bonds. The municipal bonds are exempt from some taxation, so the funds used for interest rates can be lower than the market rate. This increases the purchasing power of first-time homebuyers and often reduces monthly house payments. Online resources that describe specific local down payment programs include the following:

Homeward Bound in Texas (www.amcity.com/austin/stories/1997/10/27/focus5.html) is a site maintained by the Austin Business Journalthat describes a down payment program for first-time homebuyers in the Austin,Texas, area.

Affordable Home Ownership in King County, Washington (www.metrokc.gov/exec/news/ 7698nrl.htm), provides a news release about its Housing Finance Commission, which, in partnership with Fannie Mae, makes down payment loans to first-time homebuyers.

First-Time Homebuyer Mortgage Programs for Iowa (www.ifahome.com/partner_home_ buyer.htm) help borrowers in Iowa obtain below-market interest rate home loans. This organization has helped more than 21,000 Iowa families and individuals purchase their first homes.

The California Housing Financing Authority (www.chfa.ca.gov) is a government agency that offers loans to low to moderate-income first-time homebuyers with no money down.For additional housing information on these special first-time homebuyer programs and other government-assisted programs, see the FHA Web site (www.hud.gov).